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What is an annuity?

Annuity rules, rates and types explained

Annuities pay you a secure income for the rest of your life. You cash in all or part of your pension pot in exchange for regular payments. There are several types of annuity that calculate your income in different ways. Annuities from different providers will pay you more or less money, so you should shop around before buying one.

The different types of annuity

  • Traditional 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

    The amount of income you get is affected by your health and lifestyle choices, such as smoking cigarettes.

  • Fixed-term annuities

    Income is guaranteed for a set amount of time, after which you get a pre-agreed lump sum. You then have the option to reinvest the lump sum.

  • Investment-linked annuities

    Similarly to income 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.

How much income will an annuity pay me?

Many factors affect how much income you could get when you buy an annuity. These include the size of your pension pot, your age, your postcode and any health conditions. Income rates also vary between providers, but as you cannot usually change your mind afterwards it pays to speak to an expert to compare your options before buying an annuity.

What happens to an annuity when I die?

Normally there are no more payments after your death, although some annuity providers give you options to protect your payments upon death. You could choose a guarantee period, which is a minimum amount of time for which payments are guaranteed, or a joint life annuity where your beneficiaries continue to be paid income after you die.

Normally there are no more payments after your death.

Do you need to use your whole pension to buy an annuity?

You do not need to use your whole pension to buy an annuity. This means part of your savings could be used to buy an annuity for living expenses, with the rest held in a SIPP or other pension and available to withdraw through income drawdown or lump sums throughout your retirement.

Find out more about annuities

Get in touch with our experts for more information on buying an annuity:

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 MoneyHelper.

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