Annuities

Find out what an annuity is and why we believe you should shop around to find the right deal for you.

As you near retirement you need to think about how you can turn the money you have saved in your pension into a regular income. This is usually done by buying an annuity.

Buying an annuity involves exchanging the sum in your pension pot for a regular, sometimes guaranteed, income that you will receive throughout your retirement.

There are several types of annuity, including:

  • lifetime or fixed-term annuities
  • single life or joint life annuities
  • fixed income or escalating income 
  • investment-linked income annuities, such as with profits or index-linked annuities

There are also enhanced annuities, which can pay out a higher pension income than other annuities if you are in poor health or have an unhealthy lifestyle and are considered eligible by the annuity provider.

If you decide to buy an annuity it is important to shop around for the best deal and one with the features you need. If you decide to use a financial adviser, check our Register to make sure they are regulated and approved by us.

The Money Advice Service has more information on annuities and other types of pension income.

Enhanced annuities

If you have been diagnosed with an illness or you have health problems or a lifestyle that could reduce your life expectancy, you might be eligible for an enhanced annuity. These may also be called an ‘impaired annuity’.                                                                                    

This can mean that you receive a higher income from your annuity, though the amount you get will depend on your state of health or your lifestyle.

The Money Advice Service has more information on enhanced annuities and pension income for people with poor health.

Finding out if you are eligible for an enhanced annuity

To find out if you are eligible for an enhanced annuity you will need to give the provider certain information about your health and lifestyle. This may include some private medical information.

You will have to be open and honest about this so the provider can make a decision based on your circumstances and life expectancy.

While it is usually in your interests to shop around for an annuity, be prepared to give different information to each provider as they will have their own eligibility criteria.

Our research on annuities

We found that people buying an annuity usually benefit from shopping around.

Our review of the annuities market found 80% of people who purchased an annuity from their pension provider could have received a better deal from another provider.

We estimate that people who buy an annuity from their pension provider rather than shopping around miss out on an average of £71 per year. Over the years this would add up to a considerable sum.

However, we also found that people find it difficult to shop around for an annuity. We will therefore be working to find ways to make the process easier.

You can see more about the findings from our review of the annuities market.