How much does an annuity cost and how do I buy one?

Barry: Hi, John. Great to see you again. I've been thinking. All my life I've been working, and I've been used to getting a salary every month. A fixed amount I know is going to come in that I feel comfortable about. And then I'm going to retire. What's going to happen then?

John: The good thing about an annuity is it can replicate that. Whether you've been receiving a salary or people who haven't, they're kind of familiar with the concept of receiving a regular income. Annuity gives you that, it will pay out the amount of money you expect. It will pay out on the date you expect it, and it will continue to pay the frequency you expect. And that could be monthly. It could be half-yearly. It could be yearly. You decide, because as we've discussed before, the way the annuity is put together is to suit you and your requirements.

Barry: Well that's fantastic because it's a bit like working, getting that income without all the hard work of actually going to work. I like that, that sounds fantastic. Reassuring. That's reassuring to me. Like it would be to a lot of employed people, I suspect. How much does it cost?

John: How much an annuity costs depends on what income you want. So, if you're trying to achieve a certain amount of income that will have a specific cost to it. The minimum you can usually buy an annuity for is £5,000. Okay. But there's no upper limit. So, you can invest as much as you want to purchase that annuity. There are some things that will affect the level of income that you can get though, from that. So if you choose certain features on your annuity it can work by reducing your initial income that you receive.

John: So for example, if you were to include a loved one on your annuity so that it pays money to them after you die, then there is a cost to that. So the income that you receive will reduce slightly. That's the result. It's also worth bearing in mind, Barry, that just like a salary, the income will be taxed as income. Okay. So as you're used to unfortunately paying those taxes, you're still going to have to do that with your retirement income. And all the costs and charges are taken into consideration for the product when you get your annuity rate and when you income, there's no further costs and charges to pay there. One thing to bear in mind, though, is if you do use a financial advisor to help you, there could be charges that they make for the for the advice that they give you.

Barry: Thanks, John. So how do I calculate how much I want to spend on my annuity?

John: A good place to start would be L&G's annuity calculator. That can give you a good idea about the income that you can achieve for varying amounts of investment. There are also other calculators that you can use from providers. And even the Money and Pension Service have their calculators as well that you can use.

Barry: Okay, John. So can we work through an example. Is that all right?

John: Yeah, of course. Let's say I'm 65, I remain in perfect health. I don't want to add any options, any loved ones, anything like that to it. And I've built up a pension pot of, just say for argument's sake, a nice round figure of £100,000.

Barry: What does that get me? What do I buy for that?

John: Well, the first thing you'll get is 25% of it as a tax-free lump sum. So a quarter of your money, £25,000 you'll get tax-free from the off. Yeah, it's a good perk. And then with the remainder of the money, you would buy your income. Based on those figures, you're probably looking at about £4,700 a year as an income.

Barry: That's really helpful. But what if I built up a bigger pot of money, what if I had say for instance, £500,000 pounds?

John: Well congratulations on saving that much, Barry, you've done well. The good news is your tax-free sum increases quite a bit. So you're now up to £125,000 pounds as tax-free cash that you can take from that. And then the income that you could achieve from purchasing that annuity with the rest of it is £23,400 a year.

Barry: Right, so starting to get interesting. I'm starting to get more tax-free cash, which sounds really appealing as well. Not that I want to necessarily work for longer, but let's just say I hold off a bit and I decide to not take my annuity until a little bit later in life. Will that make a big difference?

John: Yes it does. So your annuity rate that we've discussed previously, one of the things it looks at is how long your life expectancy is. So as you get older, obviously that shortens. So you can look to get a higher income as a result. So your annuity rate will increase and the amount of income that you get will increase. So it's worth remembering, apart from the tax-free cash amounts I've said that all the income is going to be liable to income tax when you receive it.

Barry: Okay. So you still get the tax in the end?

John: They do, yes. But you still get that chunk that's tax-free.

Barry: Right, okay. Really helpful. So we've looked at these almost mythical amounts, 100,000 500,000. But when I get to retirement with my specific figure, how do I work out what's good for me?

John: The Retirement Living Standards website might be a really good place to start, Barry. It allows you to set out some of the things that you want to achieve in your retirement. Be that holidays, cars, you know, general, looking after yourself and it'll help you come up with a total sum and show you how on track you are for meeting that. It's a really, really useful website. I recommend you use that one.

Barry: Really practical. I really like this. I'm starting to think about figures, amounts and more importantly, over all of this is what I might actually want and what I might actually need, and what I want my retirement to look like and then see how I can fund it. John, you've been magnificent again, thanks very much.

John: Oh, you're really welcome, Barry. Thank you. To find out how much you can get in your retirement, try our annuity calculator. And also if you liked the video, remember to like, share and subscribe.

Barry: Hi, John. I've been listening to you. I think I'm ready. I think I'm ready to buy an annuity. Am I eligible? When can I do it? Tell me.

John: Okay, Barry. Glad to hear that you're looking to buy an annuity. If you're over 55, you're eligible. Although that will be going up to 57 from April 2028. Okay. And probably the main thing to have with that is you need to have about £5,000, at least £5,000 in your savings to purchase annuity. You'll need to check the annuity rates as well to make sure that you're getting the best income that you can. And that's annuity rates across all providers, to make sure that you're getting the best income for Barry.

John: It's also worth bearing in mind that the older you are, the more income you can get from an annuity. So if you're not 100% sure that you want to do it now, could be some value in waiting a bit longer and then you could get a higher income as a result. When I mentioned annuity rates, Barry, it's also worth remembering that those annuity rates can go up and they can go down as well. So keep an eye on those. If you're not looking to retire straight away, it's worth bearing in mind. Overall, really, there's no right or wrong time to buy an annuity, it's when it's right for you. So when you decide that's what you want to do, that's when you should probably look to do it.

Barry: Okay. So there's still a bit to think about then isn't there. But if I'm certain and I'm ready, what do I do?

John: Okay. Well, you can come direct to our website and apply for annuity there, you can get your quotes there. You can see the income and you can look at all the different options that are available to you and spend some time modelling and shaping those options to see what best suits you there. You can also look to apply through a financial advisor if you would be more comfortable doing that. If applying yourself seems a bit daunting, you can go through a financial advisor as well. Remember, Barry, if you've got any health issues or lifestyle choices that could give you a better annuity as we've discussed previously, make sure you flag those, because all of that gets taken into consideration and can give you a higher income. Probably my other main point is shop around, make sure you're getting the best income that is available on the market. It won't always be that Legal & General's is the best. Some other providers might offer a higher income.

Barry: That's great advice to hear from someone from Legal & General telling me to shop around. How rare is that? That's amazing. So, what do I do next? What happens after I've bought an annuity? You know, just practical stuff. What happens?

John: Well, once it's up and running, it doesn't change, as we've spoken about. You will continue to receive your income, on the dates that you expect to receive it. We will set all that up. You'll receive correspondence from us to remind you of when it's going to start, and the amount of income you can expect to receive. And then it's in place and you can start enjoying your retirement.

Barry: Okay and what about the people I love, the people who are close to me? If I was to die, I'd feel a bit weird if they didn't benefit in some way from it.

John: Yeah, so when you die, if you've taken out the option to pay to your loved ones and loved ones could be your spouse, a civil partner or somebody who's financially dependent on you. Then that income will then start paying to them.

Barry: Okay. So that is particularly reassuring to me because that's been on my mind the whole way through. So thank you for clearing that up. Thank you, John, for all your expertise. I've learned so much. I feel like I could be sat there being an expert myself now. You've been marvellous. Thanks very much.

John: You're welcome, Barry. Thank you. For more information and helpful guides, visit legalandgeneral.com/annuities. And also if you liked the video, remember to like, share and subscribe.

No, you can’t change your annuity once you’ve bought it. But you can opt for annuities that change in a pre-agreed way. For example, you could set up your payments to rise in line with inflation or have them transfer to a loved one after you die.

Yes, you can buy an annuity with cash. But that may or may not be a good idea. It depends on a variety of other factors, like where you’ve saved the cash and what else you could do with it. If you’re not sure, we’d recommend chatting with a financial adviser.

Yes, you can buy an annuity without a pension. But that may or may not be a good idea. It depends on a variety of other factors, like where you’ve saved your non-pension cash and what else you could do with it. If you’re not sure, we’d recommend chatting with a financial adviser.

There’s no right or wrong time for buying an annuity. UK savers probably won’t need the guaranteed income an annuity gives them until they start working part time or stop working entirely. It could be better to wait, because providers usually offer better rates as you grow older.

Yes, you can buy an annuity with savings. But that may or may not be a good idea. It depends on a variety of other factors, like where your savings are and what else you could do with them. If you’re not sure, we’d recommend chatting with a financial adviser.

If you delay buying your annuity, you’ll have to wait longer for your guaranteed income to kick in. But you’ll probably get a better rate when you do buy it. That’s because providers offer older buyers better annuity rates. If you’re not sure when’s best, ask an adviser.

The minimum amount you can spend on an annuity is £5,000. If you want to take your 25% tax-free cash out of your pot before you buy your annuity, the minimum amount you’ll need in your pot is £6,666.67.