Compare annuities: Should I buy one?
We’ve put this article together to help you decide if an annuity’s a good idea for you. So we’ll be explaining how different types of annuity work. And since people looking at annuities often also ponder annuity or drawdown, we’ll cover that comparison too.
Types of annuity
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Barry: Hi, John, I'm approaching retirement and comparing my options. I really like the sound of an annuity, but what do I need to consider next?
John: Probably what you need to consider next is what type of annuity you want. Because each annuity comes with different features, different options. And picking the right one is of paramount importance to you. Okay. You mentioned different types of annuities. So, what are they? Well the main one, Barry, is probably the lifetime annuity. And that's one that most people have heard of. So this is where we guarantee you an income for the whole of your life, regardless of what age you live to. So you live to 120, we're still paying out your annuity income. So we guarantee you that. Conversely to that, there is the fixed term annuity which is where we are guaranteed to pay you an income for a time that you choose. And that can be for reasons like filling a gap in your income. So if you wanted to reduce your hours at work, we can look to, or you can look to, take out the annuity to replace some of that income before maybe taking the big decision on what you want to do completely at retirement.
John: So it gives you a bit of breathing space to think that through. There's also an enhanced annuity. So if you are suffering ill health or you have certain lifestyle factors such as smoking, drinking, high blood pressure, things like that, then we can offer you a higher income as a result of that, because your life expectancy is then lower, so we can offer a higher income, and then you can take these annuities out with your partner, spouse, so that when you die, the income will continue to pay to them. So it gives you and your family a bit of peace of mind going forward in the future.
Barry: Well, my wife will be delighted to know that John. So is there anything else I need to know about?
John: Well there are other types of annuities that are available. If we look at, for example, a purchase annuity which is where you buy an annuity, but it's with your own funds, not your pension funds. And that will also pay you a guaranteed income for, you know, the rest of your life, if you choose so. And linked to that is an immediate needs annuity. Sorry for all the technical jargon, but the immediate needs annuity is generally used by people when they require care. And they can get the income to pay for their care needs in later life.
Barry: Everything you've told me today sounds really interesting. What do I do next?
John: So firstly, you probably want to consider that for most of these products, once you've taken one out you can't change them. They're set in stone. And there is a chance that if you die early after taking one out, then you won't get back the amount of money that you've put into them. So consider that whenever you're looking at the products. But then next steps for you, Barry, if you need financial advice, if you're still unsure, then you know, that could be a route you want to go down. And we would recommend for anybody who is really unsure what to do next. But also use the government's Pension Wise service, which is a free, unbiased, guidance service that they provide. That can help you make a bit more sense of your options without getting full financial advice. Oh, one other thing, if you want to find out more, you can search Legal & General Annuities and our website has lots of articles and guides that you'll find useful and helpful.
Barry: That's brilliant, thank you for sharing all your wisdom and insights today, John. It's been really helpful, I've got so much from it. So just thanks for your time.
John: Oh, you're really welcome, Barry. It's a pleasure. For more information and helpful guides, visit legalandgeneral.com/annuities. And also if you liked the video, remember to like, share and subscribe.
You can choose between many different types of annuity. We’ve listed them all here, with a link to the relevant product page if we offer that kind of annuity ourselves.
- Lifetime annuities regularly pay out a guaranteed sum of money for the rest of your life. And if a standard one doesn’t meet your needs, you can also get these other kinds:
- Joint lifetime annuities regularly pay out a guaranteed sum of money for the rest of your life, then keep paying it to a loved one after you die.
- Fixed term annuities pay out a guaranteed sum of money for a fixed period of time, stopping when that time ends. You can also choose a lump sum payment at the end of it.
- Enhanced annuities give you a better annuity rate if you have certain health or lifestyle issues.
- Immediate needs annuities help you cover care costs by paying a guaranteed sum of money to your care provider for the rest of your life.
- Deferred annuities let you delay the start date of your regular, guaranteed sum of money by a year or more.
- Variable annuities pay out a variable amount of money for the rest of your life, with the exact amount depending on how the investments they’re based on do.
- Purchased life annuities work like other kinds of annuity, except you buy them with a lump sum payment (usually from savings) rather than money from your pension pot.
Annuity pros and cons
This table should help you get started if you’re thinking about annuity vs drawdown:
| Annuity pros | Annuity cons |
| Annuity rates have risen in the last few years, making them more attractive. | Once you’ve made your choices and set up your annuity, you can’t change it. |
| They’re well-established products giving a completely reliable guaranteed income. | If you die sooner than expected, your annuity might cost more than it pays out. |
| You can choose between different annuity products, benefits and providers. So make sure you shop around before buying! | Annuity rates vary and other retirement income products might pay out more. Explore your product options with our Retirement Income Calculator. |
Is an annuity a good idea for you?
That’s a question only you can answer, because it depends on your goals and circumstances.
As you make your mind up, you’ll have some important questions to think through. Once you’ve finished purchasing an annuity you can’t make any changes to it, so it’s particularly important to be sure about your answers.
They’re most useful for people who need the peace of mind that a guaranteed income brings. They can become more attractive as you get older, as you’ll probably be offered better rates. And if you want to look after a loved one after you’ve gone, they can be there for you.
Bear in mind also that they don’t have to be your only retirement income source. For example, they can be part of a blended retirement solution. You could spend some of your pot on a fixed term or guaranteed annuity to cover everyday bills and expenses, and hold the rest of it back ready to draw down to cover one-off or unexpected costs.
If that sounds appealing, it could be worth having a chat with our Retirement Advice service. They’ll tell you more about how it could work for you.
Of course, annuities aren’t for everyone. If you’re a younger retiree, it might be worth waiting a bit before committing to one. If you’re after flexibility, then it’ll definitely be worth looking at other kinds of retirement income product, like drawdown – once your annuity’s up and running, you can’t make any changes to it.
And as with any financial product, it’s very important to shop around for the best deal and make sure you’re fully aware of any fees or costs.
If you’re not sure if an annuity’s right for you, our Deciding How To Use Your Pension Pot tool might be a helpful starting point.
What’s drawdown?
Putting your pension pot into drawdown means you leave your money invested for you to take out (or ‘draw it down’) as and when needed. The money left invested could grow to replace some or all of the money you draw down, though its value could also drop.
Annuity v drawdown
So let’s compare a pension annuity with drawdown. What are the main differences?
| Annuities | Drawdown |
| They’re less flexible, because once they’re set up you can’t change how they pay out. | It’s more flexible, because you can choose when and how much money you take out. |
| They’re more secure, because they give you a guaranteed income for a fixed period or life. | It’s less secure, because your savings could go down in value or just run out. |
| They’re a product you buy, so you can’t reclaim any money you spend on one. | It’s a way of investing your money, so its value might grow and it’s there when you need it. |
| You’ll get a better deal if you’re older or have certain health or lifestyle issues. | Your age, health and lifestyle make no difference to its benefits or costs. |
| If you die sooner than expected, your annuity might cost more than it pays out. | If you die sooner than expected, any money left in drawdown will go to your loved ones. |
Which is better – annuity or drawdown?
That depends on what’s most important to you. As a rule, people choose drawdown products for their flexibility and annuities for their predictability. And it doesn’t have to be an either/or pension drawdown vs annuity choice. More and more people are using both together.
For example, when you retire you might want to guarantee that you can always cover your bills. So you spend some of your pot on an annuity, which gives you a guaranteed income for life. Then you can invest the rest of it however you’d like.
Comparing annuity providers and rates
If you’re thinking about buying an annuity, it’s very important to shop around. That’s because different providers offer different products, benefits and rates. It’s also a good way of making sure you understand how annuities work.
As part of your comparison process, we recommend:
- Being very clear about your financial goals and needs. There’s no such thing as a perfect annuity for everyone. You can only choose the best one for you if you’ve got a clear sense of what it should achieve for you.
- Using our Annuity Calculator. It will help you understand what sort of rates you could get from us at different ages, and assuming different feature choices. It’s also worth exploring other reputable annuity calculators – just search online for them.
- Getting a quote from us. We will of course tell you about our products, but if you can get a better deal elsewhere we’ll also tell you about that. We want to make sure you find the annuity that’s right for you, whether or not it’s one of ours.
- Getting financial advice. Once you’ve bought an annuity you can’t change it. So it’s very important to make sure that you’re making the right choice for you. An adviser will help with that. And they can manage the annuity-buying process for you too.
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