What is an annuity, and do I need one?
How annuities work, how the guarantee is backed, and how to decide if one is right for your retirement income.
20 Nov 2024 | 5 min read
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Annuity options: configuring your income
Death benefits, guarantee periods, payment frequency and escalation - the choices that shape the income your annuity actually pays.
Protecting your income for loved ones
By default, a standard lifetime annuity stops paying when you die. You can choose to protect some of that income for a spouse, partner, or dependant instead - though this usually reduces your starting income.
The main options are a spouse's or dependant's pension (paying a percentage of your income after you die, typically 33-100%), a guaranteed period (income continues to your estate for a set number of years, commonly 5 or 10, even if you die sooner), and value protection (a lump sum death benefit, which may be subject to a 55% tax charge above certain limits).
Spouse's or dependant's pension - continues paying 33% to 100% of your income
Guaranteed period - income continues for 5 or 10 years even if you die early
Value protection - a lump sum death benefit, which may be taxed up to 55%
Single life vs joint life annuities
A single life annuity pays an income for as long as you live and nothing further after your death, unless you've added a guarantee period or value protection. A joint life annuity continues paying a percentage - typically 50% or 100% - to your spouse or civil partner after you die.
Joint life annuities pay a lower starting income because the insurer expects to pay out for longer overall. If you have a partner who depends on your pension income, it's worth comparing quotes at a range of survivor percentages before deciding.
Joint-life options usually pay 50% or 100% of your income to your survivor
Starting income is lower to reflect the longer expected payment period
Your partner's health can also affect the rate through an enhanced annuity
Fixed-term annuities
A fixed-term annuity guarantees an income for a chosen number of years - often 3, 5 or 10 - rather than for life. At the end of the term you receive a Guaranteed Maturity Amount (GMA), which you can use to buy another annuity, move into drawdown, or take as cash.
As an example, a £100,000 pension buying a 5-year fixed-term annuity might pay around £7,650 a year, with a Guaranteed Maturity Amount of roughly £72,181 at the end of the term. Figures like this vary by provider and personal circumstances and should always be checked against current quotes.
Terms typically run 1 to 20 years, most commonly 3, 5 or 10
Tax-free cash must usually be taken upfront, not at maturity
No escalation option is usually available on fixed-term contracts
Payment frequency and rising income
You can usually choose how often your annuity pays - monthly, quarterly, half-yearly or annually - and whether payments are made in advance or in arrears. More frequent payments in advance provide the most flexibility but can slightly reduce the total income compared with less frequent, in-arrears payments.
You can also choose between a level income (the same amount every payment, for maximum income upfront) and an increasing, or escalating, income (rising each year, often linked to RPI or CPI, or at a fixed percentage, to help keep pace with the cost of living but starting lower).
Level income pays the most at the start but loses value to inflation over time
Escalating income starts lower but is designed to keep pace with rising costs
Around 60% of people don't compare the whole market before buying - it's worth checking
Other Guides
More resources to help you plan your retirement
Enhanced annuities - could your health pay off?
If you have a health condition or lifestyle factor, you may qualify for a higher annuity income.
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Know your choices at retirement
Understand annuities, drawdown, and lump sums - and how to combine them for a suitable retirement income plan.
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FAQs
Common questions about configuring your annuity