Annuity Options

Welcome to our Annuity Options guide.

If you're getting ready to retire, you might be considering an annuity as a way to provide a guaranteed income for the rest of your life.

An annuity is a type of retirement income product that you can buy with your pension savings.

In this section, we'll explain the different types of annuities available to you, and help you understand which one might be the best fit for your retirement needs and why it is so important to shop around for the best annuity.


of people still do not shop around for an annuity and instead accept the deal offered by their pension provider.

The FCA has been actively working to encourage more people to shop around for the best annuity deals.

Tax Free Cash
(Pension commencement lump sum)

When you retire, it's typical to have the option of taking up to 25% of your pension fund as a tax-free lump sum, although some schemes may allow for more or less.

It's important to weigh up the benefits of taking this lump sum versus using the funds to secure a pension income, as once the decision is made, the option will not be available again.

For retirees with significant savings, using the lump sum to secure more pension income from an annuity may be advantageous, but it's important to consider the anticipated tax rate in retirement. 

Help on determining what personal allowance will be available in retirement can be found through the HMRC Website link to

Protecting the pension income in the event of the annuitant’s death

When planning for retirement, it's important to think about what would happen if the annuitant passes away AFTER retiring. There are different options available to choose from.

No Protection: If there aren't any dependents or if they have their own financial means, annuitants can choose to have no protection. This would allow more of the pension fund to generate an income for the annuitant.

Spouse's or Dependents Pension: In case of death, a nominated spouse or dependent can receive 33%, 50%, 66%, or 100% of the pension annuity income for the remainder of their life. This option would reduce the annuitant's income. The annuity company may have restrictions on who can be nominated.

Guaranteed Period: The guaranteed period is the time that the annuity will be paid in full, irrespective of whether the annuitant is alive. 0, 5, and 10 years can be chosen. After this time, the pension income will cease unless a spouse's or dependent's pension has been selected and the spouse/dependent is still alive. Choosing a guaranteed period will lower the annuitant's income.

Value Protection: If selected, this option can protect up to 100% of the pension fund on death after retirement. The fund will be returned in full minus the income payments received until the date of death. A tax liability may apply if the fund is not used to provide a dependent with an income in their own name. If the beneficiary chooses to take the fund in cash, a tax rate of 55% will apply. Value protection is limited to certain providers and types of annuity.

Income Options

An annuity allows you to choose how often you receive your income payments. Options include monthly, quarterly, half-yearly, and yearly.

However, the frequency of payments can impact the total amount of income received. If you choose to receive payments annually in advance, your income will be lower than if you chose to receive payments annually in arrears, which provides the highest income.

Each option can have an effect on the overall income paid.

Keep in mind that the longer you defer receiving income, the higher the cost of deferment.

With other retirement options like Fixed Term Annuities and Flexible Access Drawdown, you have the flexibility to choose zero income and take the tax-free lump sum.

Level or Increasing Annuity Income

Final salary (defined benefit) work-based pension schemes have a distinct advantage over most private and work-based money purchase pension schemes. That's because retirees under final salary schemes typically receive an income that increases each year, either in line with inflation or at a fixed rate.

However, most private and work-based money purchase pension schemes require retirees to purchase an annuity at retirement to receive a pension income. With an annuity, the annuitant has the option to choose between a level or increasing income.

An increasing income option means that the pension income will rise each year by a set percentage, typically 2%, 3%, 5%, or in line with inflation measured by RPI (Retail Price Index) or CPI (Consumer Price Index). However, choosing this option will mean a lower starting income, as the annuity company expects to pay more over time to keep up with inflation.

On the other hand, a level pension income option will provide the highest initial income when the annuity is started, but this income will not increase over time, offering no protection against inflation. This means that the purchasing power of the pension income will decrease as the retiree ages.

It's important for annuitants to carefully consider their options and weigh the pros and cons of each before making a decision. By using online calculators or speaking to financial experts, retirees can better understand how each option will affect their retirement income and choose the one that best fits their needs.

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