Guides

What is a Lifetime Annuity? Explained

7 minutes

Knowing you have a guaranteed income for the rest of your life can be a reassurance if you’re looking to retire.

As those golden years draw closer, you might be wondering how you’ll make your pension last. After all, you’ve worked hard, you deserve to enjoy it. For many, purchasing a lifetime annuity is the exact reassurance they need.

The wonder of a lifetime annuity is that you’ll never outlive your annuity payments, meaning you can enjoy retirement to your fullest. But, buying one too early or with minimal funds could impact the amount of income you get. For those without actuarial training, annuities can be tricky to understand which is often why you need experts to help advise you.

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.

What is a lifetime annuity?

lifetime annuity is a type of retirement income product that you buy with your pension pot. It guarantees you a regular retirement income for life, and you agree the amount when you take out a policy. Lifetime annuity options and features vary, and your choice will depend on your personal circumstances and your life expectancy.

You can use some or all of your retirement savings to buy a lifetime annuity. Annuity payments are predetermined based on factors like age and terms of the contract. You’ll decide the amount of annuity, when you receive payments, and whether you require other product options such as payments going to a beneficiary if you die. One of the key advantages of lifetime annuity is that it provides financial security through a continuous income stream for the rest of your life.

How does a lifetime annuity work?

As the name suggests, it offers a guaranteed, regular income from the start of your retirement until the end of your natural life. You’ll invest some or all of your pension pot into an annuity product, which you can do once you hit 55 years old.

While a lifetime annuity provides stability and peace of mind, it’s important to consider your financial needs, health status, and long-term retirement plans. Once you’ve bought an annuity, you can’t cancel it or change the amount you receive. Therefore, you should always look at the available options and seek financial advice before taking out a policy.

The total amount you’ll receive from a lifetime annuity depends on how long you live. This could be more or possibly less than what you originally paid for the policy. You can also take out Value Protection to protect all or part of the fund used to buy your annuity if you die.

How much retirement income can you get from a lifetime annuity?

Your income depends on how big your pension pot is, who you are, and the age you’re looking to start retirement. If you’re in poorer health, you may also be entitled to more through what’s known as an enhanced annuity. You can use an annuity calculator to understand a representative amount of what you could get.

Not all providers will offer a lifetime annuity, so you might need to shop around to find the right rate and provider for you. If you’d rather get rid of the hassle, you can seek retirement advice or a broker on a non-advised basis, that will be able to assist instead, saving you time and complex jargon.

Is a lifetime annuity right for you?

A lifetime annuity might be exactly the financial reassurance and security you need when you retire, but it does have its share of drawbacks you’ll need to be aware of. For example, there’s a chance your annuity income could be less than other retirement products on offer, and you won’t have flexibility over how much you receive from your regular payments after you’ve taken out a policy. However, other retirement products may not last as long, and you may run out of money before you pass away. Not only that but if you pass away soon after purchasing an annuity, you and your loved ones might not get the full value owed.

You should always decide whether a lifetime annuity is right or wrong for you before buying an annuity.

When could it be right?

 

  • If you’re aged 55 or older, which is the age you can access private pensions. You can opt to purchase an annuity later in life, or when you start taking your pension.
  • If you’re seeking a guaranteed monthly (or yearly) income to, then an annuity may be right for you.
  • If you’d like a dependent to continue to receive an income if you passed away.

When might it not be right?

 

  • If you want to make personal contributions to your pension, this may not be possible. Whilst you can reinvest your tax-free lump sum back into your pension, you could be heavily penalised by HMRC if you exploit these rules.
  • You want greater freedom and flexibility to access your pension as and when you want whilst growing it. If you want this, a pension drawdown might be better.

The other types of annuity products available

Lifetime annuities are ideal if you want a guaranteed income for the rest of your life. Here are some other annuity types you might find.

Enhanced annuity

If you’re in poorer health, live by certain lifestyle choices or have a reduced life expectancy, you might be eligible for an enhanced annuity which could be more suited to your circumstances. You’ll typically be paid at a higher rate because of your medical conditions or overall health. What’s more, an enhanced annuity still guarantees an income for life.

Fixed-term annuity

You might want to maximise your pension savings by receiving an income for a fixed period. Depending on the provider, you could be guaranteed an income for between one and 40 years, with the option to add death benefits too. You’ll also be able to keep any remaining pension invested, allowing it to keep growing. Of course, with a fixed-term annuity, there’s always a risk that any investment rates could fall, meaning your money is worth less.

Deferred annuity

When you hit 55, you might still be considering working for another few years. However, you may also be planning for your future by looking into how you can maximise your retirement years before you claim it. A deferred annuity allows you to do this. Claiming an annuity alongside your regular salary could push you into a higher tax bracket, which is often why people defer.

Variable annuity

You may also hear this coined an investment annuity. With a variable annuity, you have more control over how your money is invested and how much is paid out. There is normally a minimum income guarantee, and then any additional returns are offered on top of this income.

How else can you top up your retirement income?

You don’t have to be left with just one form of income when you retire, you can have a combination. Alongside your lifetime annuity, you can also claim a pension whilst withdrawing from savings or while continuing to work. There are many ways you can receive an income in retirement. These include:

With so many options available, it can feel overwhelming. Fortunately, help is never far away. If you want expert advice to guide you through retirement, why not get advice from a professional? They normally offer non-judgement and friendly advice when it comes to retirement, navigating you through the technical jargon.

Who should you speak to about a lifetime annuity?

Retirement advice specialists, or sometimes financial advisers, can help you when purchasing a lifetime annuity. Whether you’ve got a few questions you want answered, or you know it’s the right product for you, they’ll take you through the process and can set it up for you.

At LV=, our retirement advice service is on hand to help you with any burning questions you have about your retirement plans. From the first conversation, we aim to understand what you want to achieve from your retirement. We’ll view your pension options and will scout for products that could work for you. If you choose to take our advice, we’ll charge a fee, but this will cover any specialist advice you require as well as product set-up.

Get your annuity from a trusted provider

If you’re looking for an annuity, or perhaps retirement advice, you can count on us to deliver. Whilst we don’t currently offer lifetime annuities, we can support you in finding the right product for you. We encourage everyone who speaks to us to shop around the market, and find the best annuity for you and your retirement. Get in touch today or request an annuity quote.

 

FAQs about lifetime annuities

Can you change your mind about a lifetime annuity?

No, if you’ve bought an annuity, you won’t be able to change your mind when you start receiving your income. That’s why it’s really important to understand if it’s right for you before you purchase one.

When does a lifetime annuity stop?

A lifetime annuity can stop when you pass away as you can’t outlive lifetime annuity payments. However, if you have a joint lifetime annuity, the money will pass onto your spouse.

It’s worth remembering that if your spouse is still working, these payments could push them into a higher tax bracket, meaning they’ll be paying more income tax. Alternatively, a child under the age of 23 can also stand to benefit as long as they’re in full-time education. Not every provider offers this option, so it’s worth checking before you purchase.

What happens to your pension when you buy an annuity?

Nothing has to happen if you don’t want it to. You can purchase an annuity with all or part of your pension, as well as any savings you have. If you purchase it with all your pension funds, your pension pot will be closed. However, if you purchase with only part, your pension scheme will remain open until it’s empty. Not every pension will allow you to only use part of your pension to purchase an annuity so it’s best to speak to an adviser to see what is possible for you.

What if you want to access your money more frequently?

If you want more access to your money, an annuity probably isn’t right for you. Unless you’re lucky enough to buy a variable annuity, you might want something more like a pension income drawdown that allows you to take what you need from your pension.