The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

An annuity is a way of converting your pension into guaranteed retirement income for the rest of your life or a fixed number of years.

You can take up to 25% of your pension pot as tax-free cash, leaving the remainder to buy an income for either the whole of your life or a fixed term.

This guide will explain the many types of annuities on offer so you can make an informed choice.

What is an annuity?

An annuity can be bought with some or all of your pension savings. It is a financial contract between you and your insurance provider and is a means of securing a steady income in retirement.

You can use your pension pot to buy an annuity when you reach 55. This is due to rise to 57 from 2028 unless you have a protected pension age. You may also be eligible for an annuity if you’re younger than 55 but suffer from a serious health condition.

When you buy an annuity with your pension, you’ll receive a guaranteed retirement income for either the rest of your life or a predetermined number of years, depending on the type of annuity purchased and your personal and financial circumstances.

Which type of annuity is best for you depends on many factors such as any alternative sources of retirement income you may have, your health status, and what level of financial risk you are willing to hold.

What are the different types of annuity?

There are eight main types of annuities you can purchase with some or all of your pension pot:

• Lifetime annuity - Pays a guaranteed income for the rest of your life after you buy it with a lump sum.

• Joint lifetime annuity - Provides income for life and continues paying (often reduced) to a partner after you die.

• Fixed-term annuity - Pays a guaranteed income for a set number of years rather than for life.

• Enhanced annuity - Offers a higher income if you have health issues or lifestyle factors that may reduce life expectancy.

• Deferred annuity - Starts paying income at a future date rather than immediately after purchase.

• Variable annuity - Income payments can rise or fall depending on the performance of underlying investments.

• Immediate needs annuity - Designed to pay care home fees or long-term care costs for the rest of a person’s life.

• Purchased life annuity - An annuity bought with personal savings that pays regular income, partly treated as a tax-free return of capital.

Please note LV= can help you arrange most of these annuities but not every type of annuity listed. For more information call us on 0800 032 9301.

1. Lifetime annuity

A lifetime annuity pays you a guaranteed income for the rest of your life. When you buy one you agree on the amount, how frequently you’re paid, and whether you want other benefits like payments going to a beneficiary when you die.

You may consider buying a lifetime annuity if you’re looking to protect your pension savings from any investment risk, for added peace of mind, or if you’re concerned your retirement money may run out.

You don’t have to use all of your pension to secure an annuity. For example, you can buy an annuity to cover some but not all of your retirement needs.

You can also buy a lifetime annuity where the payout increases each year to protect you from inflation. Not every provider will offer this, and a financial adviser can help you to determine which is best for you.

When you buy an annuity, the decision is irreversible, and you can’t change your mind at a later date.

Income received from an annuity typically varies between insurance providers. Depending on how long you live, you may also get less out of your annuity than you pay in, although you can also use it to provide family and loved ones with an income or a lump sum when you pass away.

2. Joint lifetime annuity

Like lifetime annuity, joint lifetime annuity pays a guaranteed fixed income for the rest of your life. The difference is that a joint lifetime annuity keeps paying out to a loved one or beneficiary when one of you dies.

Joint lifetime annuity is mostly designed for couples so that when you die that income passes to someone else like a husband, wife, partner, or dependent.

With joint lifetime annuity, you may be asked to decide how much of your retirement income goes to your chosen beneficiary. This can typically range from 50% to 100% depending on the agreement you have with your provider.

While a joint lifetime annuity continues after you die, it generally provides a smaller income than single life annuity.

3. Fixed-term annuity

Whereas lifetime annuity and joint lifetime annuity pay income until death, a fixed-term annuity provides guaranteed payments for a set period of time. This can be anything between one and 40 years, although five to 10 years is more common.

Your provider invests the money you pay for this type of annuity. In addition to a guaranteed retirement income, you’ll receive a lump sum at the end of the agreed term which includes:

• The amount you put in.

• Profit on the investments minus the income you’ve already received.

You’ll agree on the value of the lump sum, or ‘maturity amount,’ when you take out a fixed-term annuity. The lower the amount of guaranteed income, the bigger lump sum you’ll receive. Also, if you die before your fixed-term annuity ends, the lump sum can be paid to a dependent or chosen beneficiary. You don’t need to take an income, and can just receive the tax-free cash.

At the end of the fixed term, you can use the lump sum anyway you choose. You may consider buying another annuity with a more favourable rate based on your age or health situation. Or you could use it to provide a flexible retirement income like a pension drawdown, for example.

4. Enhanced annuity

Whether through poor health or lifestyle choices such as smoking, if you or your partner have a reduced life expectancy you may qualify for an enhanced annuity.

You’ll normally be paid at a higher rate due to your medical conditions, health status, and associated risks. You’ll still receive a guaranteed income for the rest of your life. You can protect an enhanced annuity against inflation, and you can also take out death benefit which provides your chosen beneficiary with payments or a lump sum after you die.

There are a vast number of medical conditions and lifestyle choices that can make you eligible, depending on provider, for an enhanced annuity including:

5. Deferred annuity

A deferred annuity, or deferred income annuity, allows you to postpone the start of your annuity payments by one year or more. Deferring your annuity income could be beneficial when:

• You’re over 55 and still working.

• Claiming an annuity alongside your salary would push you into a higher tax band.

You can buy a deferred annuity with a single lump sum or several instalments. Your provider will likely invest your money and you’ll receive an agreed rate of interest based on your age and how much money you put in.

While your investment could grow in value over time, there is always a risk that its value could also decrease if your provider’s strategy doesn’t work out. 

6. Variable annuity

A variable annuity is a type of lifetime annuity. Some of your income is guaranteed, and the rest is linked to investment performance. A variable annuity gives you more control over your money and investments than other types of annuities.

Variable annuities allow you to choose the guaranteed income you need from part of your pension savings. The remaining balance is then invested and provides additional income based on performance.

Also known as investment-linked annuities, flexible annuities, or with-profits annuities, variable annuities allow you to decide how your money is invested. This could boost your retirement income when investments go well, but you may only receive the minimum guaranteed amount if there’s a downturn in performance. 

7. Immediate needs annuity

As you grow older, you may need additional funds to pay for the cost of a care home or a move to a care home. An immediate needs annuity provides a regular income to cover this cost, and the money paid out is tax-free if it goes directly to your registered care home provider.

Immediate needs annuity pays out for the rest of your life and can offer peace of mind that you won’t run out of money when paying for long-term care. Some providers also offer immediate needs annuity with increasing payments should your care costs go up over time. 

8. Purchased life annuity

You can buy purchased life annuity with money that’s not from your pension pot. You can also buy it with the tax-free payout you’ll receive when you start accessing your pension savings.

Your annuity payments will include some of the money invested plus any interest. You’ll pay income tax on the interest, but not on the capital (your investment).

Purchased life annuity can be capital protected so it pays out at least as much income before tax and the amount used to buy the policy. If you choose not to protect this type of annuity when you buy it, you won’t get any money when you die.

When would you buy an annuity?

You may consider buying an annuity as a means of receiving pension savings through regular, guaranteed payments for either a fixed term or the rest of your life.

An annuity may be a good option when:

• You need a guaranteed income every year.

• You’d like a guaranteed income for a fixed term or the rest of your life.

• You want to avoid risky investments.

How much income will an annuity provide?

The retirement income you’ll receive from an annuity depends on several factors including:

• The amount of pension savings you have.

• Your age when you buy your annuity.

• How long the annuity lasts (fixed term or the rest of your life).

• Your health status and lifestyle choices.

• Annuity rates at the time of purchase.

• Where you’ll live in retirement.

• The type of annuity, income preference, and features you select.

You can work out how much income you’re likely to receive from an annuity using our helpful annuity calculator.

What are the advantages and disadvantages of an annuity?

There are many benefits and drawbacks to buying an annuity that you should consider. For instance, you’re likely to receive less income if you buy an annuity at the age of 57 than you would at 70 because your provider will probably make fewer payments.

The advantages and disadvantages of an annuity include:

Do you need advice about the different types of annuity?

Our retirement and pension advice service will help you understand annuities, get the most out of your pension savings, and plan for retirement. Speak to one of our advisers or contact us today to help you make an informed decision on your options.