How do annuities work?
An annuity is a retirement product that allows you to swap some, or all, of your pension savings for a regular income that’s guaranteed to be paid for life.
Annuities are provided by a handful of insurance companies, and how much you get will depend on the annuity rate offered by the provider at the time, as well as other factors.
Unlike some other retirement options, you don’t need to worry about how much to withdraw or what the stock markets are doing. Your income will be secure and paid to you no matter what happens.
You can buy an annuity any time from age 55 (rising to 57 from 2028). When using the money in your pension to buy an annuity, you can usually choose to have up to a quarter (25%) of the amount paid to you as a tax-free cash lump sum, and use the rest to buy the annuity. The annuity income you receive is taxed as earned income.
Pension and tax rules can change and any benefits depend on your circumstances.
Buying an annuity
It’s important you shop around to find out how much annuity income you could get. Your current pension provider is unlikely to offer you the best deal. There are currently five annuity providers in the open market and each one will offer you a different annuity rate.
Our online annuity calculator can help you compare quotes from five annuity providers. Your quote will show you exactly how much income you could get each year based on the annuity options you choose. With quotes there is no obligation to buy an annuity but they’re only guaranteed for a limited period and rates will go up and down in future.
All you need to do is answer a few questions about you and your pension. And if you confirm your health and lifestyle details - it could mean you'll get a higher annuity income.
Factors that affect your annuity income
Many different factors will affect how much annuity income you get. And it’s important to remember, that once you’ve bought your annuity and secured the annuity rate, your income is set for the rest of your life and cannot be changed, so make sure you consider your options carefully. Factors which affect your annuity income include:
The size of your pension
The more of your pension you use to buy an annuity, the higher your income is likely to be. Although, you may not want to lock your entire pension into an annuity in one go, so buying more than one annuity over time may be a strategy worth considering.
Annuity rates at the time you buy
Annuity rates determine how much income you could get. They change all the time because they’re linked to gilt yields (the yield made on government bonds) and are particularly sensitive to interest rate changes. If yields are high, you tend to get higher annuity rates. If they’re low, rates can be lower. View our best annuity rates.
Your age, health and lifestyle details
You’ll tend to get a higher annuity income the older you are. Plus, if you disclose unhealthy lifestyle choices or underlying health conditions it can also lead to more income. Even confirming details like how much alcohol you drink or your height and weight could mean you get an enhanced rate. More on health and annuity rates.
The type of annuity and features you choose
When you set up an annuity, you can choose for your income to increase over time, to receive monthly or annual payments and if your income should continue to your spouse when you die. More on annuity options.
Balance security and flexibility
Throughout retirement it’s likely that your income needs will change and you might need to use more than one retirement option.
Combining your options could help you find the right balance.
For example, you could use an annuity to help cover essential costs, and use the flexibility of drawdown for your nice-to-haves, or to help you semi-retire.
Why use HL's annuity service?
- Get live quotes within minutes
- Find the best rates from the UK’s leading annuity providers
- Get support from a team of dedicated retirement experts
- We're a secure, FTSE 100 company, helping UK investors for more than 36 years
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Guide to annuities
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