What is an annuity?

An annuity is a type of retirement income product that you buy with some or all of your pension pot. It pays a regular retirement income either for life or for a set period.

Annuities – the basics

Annuities are retirement income products sold by insurance companies. They include:

  • lifetime annuities – which pay you an income for life, and will pay a nominated beneficiary an income for life after you die if you choose this option; they include basic lifetime annuities and investment-linked annuities
  • fixed-term annuities – which pay an income for a set period, usually five or ten years, and then a ‘maturity amount’ at the end that you can use to buy another retirement income product or take as cash

When you use money from your pension pot to buy an annuity you can take up to a quarter (25%) of the amount as tax-free cash. You then use the rest to buy the annuity and the income you receive is taxed as normal income.

How much retirement income you will get from an annuity – and for how long – will depend on:

  • how old you are when you buy your annuity
  • how big your pension pot is
  • your health and lifestyle
  • annuity rates at the time you buy
  • which annuity type, income options and features you choose
  • where you expect to live when you retire

Once you buy an annuity you can’t change your mind, so it’s important to get help and advice before committing to one.

To find out more about the different annuity types – and the different options and features you can choose when buying them – read our guides below. You’ll also find information on where to get help and advice and how to shop around for an annuity.

Higher income for medical conditions or unhealthy lifestyle

If you have a medical condition, are overweight or smoke, you may be able to get a higher income by opting for an ‘enhanced’ or ‘impaired life’ annuity. Not all providers offer these so be sure to shop around if you think you might benefit from one.

Find out more about enhanced and impaired life annuities in our guide Higher retirement income for people with poor health.

Your other retirement income options

An annuity is just one of several options you have for using your pension pot to provide a retirement income. For an overview of all of your options and more on where to get help and advice see our guide Options for using your pension pot.

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