Don’t make your final decision until you’ve received different comparisons

Before you can start planning your retirement, you need to understand how the money you’ve built up in your pension will be used to provide you with an income when you retire. One of the options you could choose is to invest most of your pension in an annuity, which pays you a regular income throughout your retirement years.


You purchase an annuity using the lump sum from your pension or, perhaps, some savings, which provides you with a guaranteed income for the rest of your life. The size of the income you receive, however, usually depends on the size of your pension fund, your age, your gender and your health. In the UK more than £10bn is invested in annuities every year.

Annuity quotation
When you retire, your pension fund provider will inform you of your pension fund total and offer you an annuity quotation based on the size of your fund. In general, most people purchase an annuity by the time they reach age 75.

Your choice of annuity will depend largely on your financial circumstances, the value of your pension(s), your retirement expectations and, possibly, on your health or the health of your dependants.

You can choose whether you would prefer a level annuity or an escalating annuity. Level annuities pay you a fixed level of income each year, while an escalating annuity increases each year in line with inflation.

The income generated from an escalating annuity is usually significantly lower in the first few years than you would expect to receive from a level annuity.

Poor health
If you suffer from poor health, you may qualify for an enhanced annuity or an impaired life annuity. These usually pay a higher income amount if your health problems (such as high blood pressure, kidney problems or diabetes) could potentially reduce your lifespan. You might also be able to receive an ‘enhanced annuity’ if you are a smoker or diagnosed as obese.

Shopping around
You can purchase your annuity from any provider and it certainly doesn’t have to be with the company you had your pension plan with. The amount of income you receive from your annuity can vary between different insurance companies, so it’s essential to receive comparisons before making your final decision.

‘Open market’ option
Remember that you do not have to accept your pension fund provider’s annuity offer and could find much better value elsewhere. Pension fund providers are also now legally obliged to inform you of your rights to choose an annuity. You can decide to take the ‘open market’ option providing that you haven’t already taken any benefits from your pension or agreed an existing annuity with your pension provider.

Before you take out your annuity, you could also opt to withdraw a tax-free lump sum – up to 25 per cent of the total value of your pension – known as a Pension Commencement Lump Sum.

Best course of action
At times of falling annuity rates it might be tempting to hold off buying an annuity, perhaps while you wait for rates to increase. But this may not necessarily be the best course of action. If you decide to delay your purchase, rates could fall even further. In addition, every month an annuity is deferred is a month without income and this lost income may not be recouped in the future.

A pension is a long-term investment. The fund value may fluctuate and can go down as well as up. You may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.