Types of annuities
Traditional, enhanced and other types of annuity
There are many different types of annuity, each with its own individual features and benefits. Although every annuity allows you to exchange some or all of your pension for a guaranteed income for retirement, the type of annuity you choose could significantly affect the rate of income you are offered. Many providers also let you personalise your annuity further with a number of optional features, such as inflation protection or a minimum guarantee period.
What are the different types of annuity?
- Conventional annuities – You exchange your pension for a guaranteed income that stays the same, regardless of any changes to your health or the financial markets.
- Enhanced annuities – your guaranteed retirement income is affected by your health and lifestyle choices, such as smoking cigarettes. See below for more information.
- Variable annuities – you are given a variable income with a minimum rate, based on the performance of a selected investment fund. Rates are lower than for conventional annuities, but have the potential to increase in line with the investment.
- Fixed-term annuities – your income is guaranteed for a set amount of time, after which you will receive a pre-agreed lump sum. This gives you more flexibility than a traditional annuity as you have the option to reinvest your lump sum upon maturity.
- Investment-linked annuities – similarly to flexi-access drawdown, your income could go up or down depending on the performance of your underlying pension investments. However, most providers will offer you a guaranteed minimum level of income.
What is an enhanced annuity?
With this type of annuity your health and lifestyle affects your level of income – so if you smoke, take prescribed medicine or have a health condition then you could get paid more. This is because enhanced annuity providers base your level of income on your life expectancy and the number of payments they expect to pay out over the remainder of your life. For this reason it pays to be as accurate and detailed as possible when applying for an annuity quote.
Compare enhanced annuity rates
An estimated 60% of people qualify for an enhanced annuity. (Just Retirement Limited research, April 2013).
Personalising your annuity
Most providers will offer you a number of optional features for personalising your annuity. For example, you may be able to protect your income against the effects of inflation to maintain the purchasing power of your money. You could also choose a minimum period (usually 5 or 10 years) for which you will be guaranteed an income, or you may be able to opt for a pre-agreed sum to be paid to your partner or beneficiaries after you die. Contact us on 020 7189 2400 for more information on your options.
Download one of our free pension guides
The decision to access your pension is an important one and will affect your income and possibly your standard of living for years to come. Therefore we recommend that before any decision is made you receive regulated financial advice or get free guidance from Pension Wise. Find out more about Pension Wise.