Types of annuity
If you’re looking for a guaranteed retirement income, an annuity could be the right choice for you. But there are many different types of annuity. In this article, we’re going to explain them, covering:
- Lifetime annuities.
- Joint lifetime annuities*.
- Enhanced annuities*.
- Immediate needs annuities.
- Deferred annuities.
- Variable annuities.
- Purchased life annuities.
We start with lifetime, joint lifetime, enhanced annuities and immediate needs annuities because they’re the only annuity types that we offer. And because we have a separate fixed term annuity article we’ve left them off the list.
*these are both types of lifetime annuity.
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.
What is a lifetime annuity?
Lifetime annuities regularly pay out a guaranteed amount of money for the rest of your life. You agree the amount when you buy one. You’ll also decide how often you’ll get it and whether you want to go for other product options.
Once you’ve bought an annuity, you can’t change the amount you get or cancel it. That’s why it’s very important to make sure you choose the right one by shopping around and getting financial advice. The total amount it pays out will depend on how long you live. You might get back more or possibly less than you originally paid for it. If you choose death benefits such as Value Protection, you can protect all or part of the amount you used to buy your annuity.
What is a joint lifetime annuity?
A joint lifetime or joint life annuity is a lifetime annuity that keeps paying out to a loved one (usually a partner) after you die. That’s often called a spouse benefit option. You’ll choose what proportion of your annuity it keeps paying out when you set it up.
What is an enhanced annuity?
An enhanced annuity is a lifetime annuity that pays out at a higher rate because it’s for someone with particular health or lifestyle issues. Our enhanced annuity article explains how that can work.
What is an immediate needs annuity?
An immediate needs annuity gives you a regular income towards the cost of care at home or in a care home. The money it pays out will be tax-free if it goes straight to a UK registered care provider. Because an immediate needs annuity pays out for the rest of your life, it can provide some reassurance that your money won’t run out when paying for long term care.
If you’re thinking about buying an immediate needs annuity, it’s worth remembering that your care costs might well increase over time. You might be able to take one out with increasing payments. If you choose not to do that, make sure you have other sources of income in place to cover any cost increases. And if you’re not sure what sort of future care costs you might have to cover, our care costs calculator can help.
As a footnote, be careful not to confuse immediate needs annuities with immediate annuities. An immediate annuity is a type of annuity that you can only get in the US.
Annuity vs. Drawdown
Annuity and drawdown are two of the most common ways of taking a regular income in retirement. Learn more about them in our article and see if either or both are right for you.
What is a deferred annuity?
A deferred annuity (aka deferred income annuity) lets you delay the start date of your annuity payments by a year or more. You can buy deferred annuities with a single lump sum or several payments. Deferring your annuity income can be useful if you’re still earning now and more money coming in would push you into a higher tax band.
Before your payments begin, your provider will probably invest your money. You’ll get an agreed rate of interest on it, with the exact amount depending on your age and how much money you’ve paid in. And of course if your provider’s investment strategy works out its value could grow. Though of course, as with any investment, there’s always the risk that its value could go down too.
What is a variable annuity?
Also known as flexible annuities, investment annuities or with-profits annuities, your income will depend on how well your investment has performed, so its value could go down as well as up.
What is a purchased life annuity?
A purchased life annuity is an annuity that you buy with money that doesn’t come from a pension pot. So you could invest money from a house sale, your savings or an inheritance in one. Each annuity payment you receive will include an interest payment on the money you have invested and a return of part of your original investment. But you’ll only pay income tax on the interest part of your annuity payment.
Apart from that, it’s a lot like other kinds of annuity. So for example you’ll get a guaranteed income for life and you can pass that income on to a loved one if you die.
What should I do next?
It’s really important to have a good understanding of all the different annuity types, and the different ways they can help you meet your retirement needs and goals, before you choose one. If you’re not sure about them, it could be worth:
- Booking a free appointment with Pension Wise, an impartial guidance service from MoneyHelper.
- Finding a financial adviser at Unbiased, though you’ll probably have to pay for their advice.
You can find out more about our own annuity on our annuities page. And you can use our annuity calculator to see how much different types of annuity could pay out to you at different ages.
Related articles
How much does an annuity cost; £100k, £300k and £500k pension pots
Guide to buying an annuity
What are the latest annuity rates?
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