Annuity options: configuring your income
Death benefits, guarantee periods, payment frequency and escalation - the choices that shape your annuity income.
22 Nov 2024 | 6 min read
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What is an annuity, and do I need one?
Understand how annuities work, how the guarantee is backed, and how to decide if one is right for your retirement income.
What is an annuity?
An annuity is a guaranteed income for life, bought with some or all of your pension pot from an insurance company. In exchange for your pension fund, the insurer pays you a fixed or rising income for as long as you live - no matter how long that turns out to be.
This works because annuity providers pool risk across thousands of customers. Some people live longer than average and receive more than they paid in; others receive less. Annuities are also backed mainly by low-risk assets such as UK government bonds (gilts), which is part of why the income is so certain - though as with any product, there is no such thing as zero risk.
Income guaranteed for life, however long you live
Backed mainly by UK government bonds (gilts) for a low-risk income
Health and lifestyle factors can increase your rate, sometimes by 40% or more
Do I need an annuity?
An annuity isn't the only way to take a pension, and it isn't right for everyone. It suits people who value certainty most: a guaranteed income that covers essential costs and can never run out, regardless of what happens in investment markets.
If you already have other guaranteed income - such as a defined benefit pension or a large state pension entitlement - you may prefer to keep more of your pot flexible in drawdown instead. Many people choose to blend the two: an annuity for essentials, drawdown for everything else.
Can be combined with drawdown for security and flexibility together
A regulated adviser can model whether an annuity, drawdown, or a blend suits you
Best suited to covering essential costs you can't afford to see fall short
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FAQs
Common questions about annuities