Choosing the type of annuity that’s most suitable for you requires financial advice that can only be provided by an authorised financial advisor.
To help you in your decision making, we’ve answered a number of frequently asked questions about annuities. Here you’ll find a number of facts and areas to consider before making your choices.
What's an annuity?
An annuity guarantees you a regular income in retirement. It’s an insurance-style product that you buy using your pension savings. You’re then guaranteed an income for the rest of your life or for a fixed-term.
Where can I buy an annuity?
Annuities are sold through pension providers and insurance companies. By getting a live quote with us the buying process is made a whole lot easier.
How are annuities paid?
Annuities are paid by your provider on a monthly, quarterly or annual basis. It depends what works for you.
Do I pay tax on my annuity?
Annuity income is taxed in the same way as regular income. If your yearly earnings are over the basic rate threshold (£11,000) you'll pay 20% on it. You can take up to 25% of your pension savings as a tax free lump sum before your regular income payments start.
What happens to my annuity when I die?
Most annuities stop paying out when you die even if you've only just purchased it.
If this happens your pension fund’s value is lost and usually can’t be transferred to your beneficiaries unless you include certain options in your annuity. Some annuity products such as joint life annuities, allow partners and dependents to receive some of your annuity income after you die. Always clarify any benefits before you make a purchase.
Do I have to buy an annuity?
No. Annuities are still the most popular retirement income option due to the security they offer. But there are other options available, such as income drawdown.
The other options can be more flexible than annuities but may be riskier. You could consider combining retirement income options depending on your needs and circumstances.
Buying an annuity
When should I buy my annuity?
You can buy an annuity from the age of 55. Whether you buy as soon as you hit 55 or hold on until you're older is your call. There are pros and cons to both options.
Buying straight away means you’ll generate an income from your pension sooner. Annuity rates could be less favourable in the future if the economy declines. You're more likely to see the full value of your pension pot if you buy when you're younger and healthier. If you have a single life annuity without certain options your annuity stops when you die no matter when you purchase it.
Buying later in life can mean enjoying a higher income as annuity rates are calculated based on your life expectancy. Being older or in poor health means you’ll probably get a higher income.
Have I waited too long to buy an annuity?
Before 2011 annuities had to be purchased before you reached the age of 75. This requirement has been relaxed and you can now keep your pension invested indefinitely. Bear in mind if you wait too long to buy your annuity you're less likely to see the full value of it.
Can I buy more than one annuity?
Yes. If you’ve got several pension pots you could buy a number of annuity products.
Alternatively if you’ve got a single pension fund you could split it across different annuities. It could be beneficial to combine a higher-risk investment-linked annuity and a minimal-risk level annuity.
Our annuity specialists can help you understand whether combined annuity products are right for you.
Can I change my mind after buying an annuity?
Not at the minute. Once you’ve purchased your annuity you can’t get a refund or switch to a different provider. It’s crucial to understand if an annuity is the right choice before committing to a purchase. Providers may offer a 'cooling off' period for cancelling but these aren’t too common.
The government are preparing to introduce a second-hand annuity market in April 2017. You’ll be able to sell your annuity income for a lump sum. No full details have been released yet.
Can't I just buy my annuity from my existing provider?
You can. But if you fail to shop around the chances are you won’t get the best deal. Annuity rates vary between providers.
8 out of 10 people could get a higher annuity by comparing their quote with us. 1 in 6 of these could see a 10% boost to their income.
What’s the open market option?
It’s your right to compare all the UK’s providers to find the best annuity quote. More than 50% of annuity customers purchase their annuity directly from their pension provider without shopping around. If you do this you’re potentially losing out on £1000s in income.
Why are people who are older or in poor health offered better annuity rates?
Your life expectancy is a key factor in calculating your annuity rate. So if you smoke, are overweight, are older, or suffer from life-shortening medical conditions you might be offered a higher income with an enhanced or impaired health annuity.
How do I know which type of annuity is right for me?
Each annuity type has its own distinct pros and cons. Your best option depends on your personal circumstances, priorities and financial needs. You can read more about the differences at our ‘Types of Annuity’ page.
Why do you need my postcode?
Life expectancy varies across the UK so annuity rates can even be affected by where you live. This information is only used to get you an accurate quote.
I only have a small pension fund, is buying an annuity worth it?
The smaller your fund the lower your annual income will be. If you're concerned your pension fund might not be enough to provide an income you can live on you may benefit from speaking to an independent financial advisor.
What if I can’t remember what pensions I’ve paid into?
Like many people it’s possible you’ve paid into multiple pensions throughout your life. If you’re struggling to keep track contact the Pension Tracing Service for free assistance.
Can I buy an annuity with my state pension?
No. Annuities can only be purchased with your private pension fund. The state pension already provides a guaranteed income paid directly to you.
Do I have to take tax free cash?
You have the opportunity to take up to 25% of your pension fund as tax free cash at any time after your 55th birthday. You don’t have to take the money but you won’t be able to change your mind later. Consider this option carefully before making a decision.
You may be able to get the first 25% of any income paid tax free depending on your annuity provider.
Is my money safe when I buy an annuity?
At Compare Annuity we deal with a network of specialists who only work with fully regulated UK insurers covered by the Financial Services Compensation Scheme. If a provider goes out of business you’re eligible for compensation. You can read more about the FSCS on their official website.