Pension Annuity

A pension annuity is an insurance product you buy with some or all of your pension pot. In return, the annuity provider pays you a guaranteed income, usually for the rest of your life. Once purchased, the terms are typically fixed, so the income you receive will not change regardless of what happens in the financial markets.

There are several types of annuity. A level annuity pays the same amount each year, while an escalating annuity increases annually to help keep pace with inflation. A joint-life annuity continues to pay an income to your spouse or partner after you die. Enhanced annuities may offer a higher income if you have certain health conditions or lifestyle factors such as smoking. You can also choose a guaranteed period, which ensures payments continue for a set number of years even if you die shortly after purchase.

Annuity rates depend on factors like your age, health, the size of your pot, and interest rates at the time of purchase. It is important to shop around using the open market option rather than simply accepting an annuity from your existing pension provider. Many people in the UK now combine an annuity with drawdown to get both guaranteed income and flexibility in retirement.