What are annuities?

You can spend a lump sum of your pension pot on an annuity, which gets you a regular income for the rest of your life. Find out how.

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Annuities are a way of cashing out on your pension pot. You purchase an annuity from an insurance provider to give you an income for life. We explain everything you need to know below.

Saving for your retirement can seem a little confusing – how much do you need to save? How many years do you need to be able to cover? How do you work out how much you’ll spend while retired? It doesn’t help that the state pension amount and pension age changes at least every few years.

Here, we’re going to cover annuities. These are something you usually consider when you’ve saved up your pot, but it’s worth understanding them before this, so you know what’s coming.

We all imagine that at our pension age, we get access to our pension the same way Harry Potter got access to his parents’ fortune. Unfortunately a goblin isn’t going to lead you to your vault and give you free rein of your money. You are able to get access to it from age 55, but you’ll be taxed on most of it this way.

There are several ways to get access to your money, and one of them is an annuity.

Compare pensions

Data indicated here is updated regularly
Name Product Minimum investment Choose from Annual fee Brand description
Interactive Investor Pension
Any lump sum or £25 a month
Over 3,000 funds
£10/month
interactive investor is a flat-fee platform, which makes it cost effective for larger portfolios. Capital at risk.
Moneyfarm Pension
£1,500 (initial investment)
7 funds
0.35%-0.75%
Moneyfarm has pensions that are matched against your risk appetite, goals and planned retirement date. Capital at risk.
AJ Bell Pension
£1,000
Over 2,000 funds
0.05-0.25%
AJ Bell has two different pension options, a self managed pension and one that is managed for you. Capital at risk.
PensionBee Pension
No minimum
7 funds
0.5% - 0.95%
Pension Bee is a newbie in the pension market. It helps consolidate your pension plans into one place. Capital at risk.
Hargreaves Lansdown Pension
£100 or £25 a month
2,500 funds
0-0.45%
Hargreaves Lansdown is the UK's biggest wealth manager. It's got three different retirement options. Capital at risk.
Saxo Markets Pension
Saxo Markets Pension
£10
Over 11,000 funds
No annual fee
Saxo Markets gives flexibility and control over your investment strategy. Capital at risk.
Penfold
Penfold
No minimum
4 portfolios
0.75-0.88%
Moneybox Pension
£1
3 funds
0.15% - 0.45% charged monthly
Manage your money with an easy-to-use Moneybox app. Capital at risk.
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Compare up to 4 providers

Data indicated here is updated regularly
Name Product Price per trade Frequent trader rate Platform fees Brand description
Fineco
£2.95
£2.95
Zero platform fee
Your first 100 trades are free with Fineco, T&Cs apply.
Fineco Bank is good for share traders and investors looking for a complete platform and wide offer. Capital at risk.
eToro Free Stocks
0% commission, no markup, no ticket fee, no management fee
N/A
Withdrawal fee & GDP to USD deposit conversion
Capital at risk. 0% commission but other fees may apply.
IG
0% commission on US shares, and £3 on UK shares
From £5
£0 - £24 per quarter
IG is good for experienced traders, and offers learning resources for beginners, all with wide access to shares, ETFs and funds. Capital at risk.
Hargreaves Lansdown Fund and Share Account
£11.95
£5.95
No fees
Hargreaves Lansdown is the UK's number one platform for private investors, with the depth of features you'd expect from an established platform. Capital at risk.
Degiro Share Dealing
£1.75 + 0.022% (max £5.00)
£1.75 + 0.022% (max £5.00)
Portfolio transfer fees (in & out)
Degiro is widely seen as one of the best low-cost share brokers, for people who are looking to trade regularly. Capital at risk.
Interactive Investor
From £7.99 on the Investor Service Plan
From £7.99 on the Investor Service Plan
No transfer fees or exit fees. £9.99 a month on the Investor Service Plan
Open an ISA, Trading Account or SIPP you will get £100 of free trades to buy or sell any investment (new customers only).
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. Capital at risk.
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Data indicated here is updated regularly
Name Product Minimum deposit Maximum annual fee Price per trade Brand description
Interactive Investor stocks and shares ISA
Any lump sum or £25 a month
£119.88
£7.99
Interactive Investor offers everything most investors need. Its flat fees makes it pricey for small portfolios, but cheap for big ones. Capital at risk.
Moneyfarm stocks and shares ISA
£1500
0.75%
£0
Moneyfarm helps you meet your investment goals with fully-managed portfolios designed around you. Capital at risk.
Hargreaves Lansdown stocks and shares ISA
£100
0.45%
£11.95
Hargreaves Lansdown is the UK's biggest wealth manager. It's got everything you'll need, from beginners to experienced investors. Capital at risk.
Nutmeg stocks and shares ISA
£100
0.75%
£0
Nutmeg offers three types of portfolios. Choose the one that goes with your investment style. Capital at risk.
Saxo Markets stocks and shares ISA
No minimum deposit requirement
0.12%
£8.00
Saxo Markets offers a wide access to a range of stocks, ETFs and funds. Capital at risk.
AJ Bell stocks and shares ISA
£500
0.25%
£9.95
AJ Bell is a good all-rounder for people who to choose between shares, funds, ISAs and pensions. Capital at risk.
Fidelity stocks and shares ISA
£1000 or a regular savings plan from £50
0.35%
£10.00
Fidelity is another good all-rounder, offering a good package at a decent price. Not suited for trading shares. Capital at risk.
Legal & General stocks and shares ISA
Legal & General stocks and shares ISA
£100 or £20 a month
0.61%
N/A
Legal & General is a big financial services company which offers insurance, lifetime mortgage, pensions and stocks and shares ISAs. Capital at risk.
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What is an annuity?

An annuity is an insurance product that offers an annual income for the rest of your life in exchange for a lump sum. The insurer is hoping that it doesn’t end up paying out more than it takes from you in a lump sum, while you are hoping you live long enough to work out better off. You’re both betting against one another.

What is an annuity rate?

An annuity rate is the amount of your pension pot that the provider will pay out each year.
Say you have £250,000 saved and you get a rate of 5%, you’ll get an annual income of £12,500 every year until you die.

If the annuity provider reckons you’ll kick the bucket soon, it will offer a higher rate. If it thinks you’ve got a few extra years in you, you’ll be offered a lower rate.

We have a guide to the best annuity rates if you want to check them out.

What types of annuities are there?

There are loads of different types of annuity on the market.
Here’s a brief description of each one:

Level

The insurer pays out a level amount each year for the remainder of your life. You tend to get a high rate with these, but inflation will reduce the spending ability of your income over time, so you won’t get as much for your money towards the end.

Escalating

Escalating annuities pay out a little more each year than the previous year. You can choose for it to rise by a certain percentage or have it rise with inflation, which will be raised in line with the Retail Prices Index. These annuities cost more, but will rise with inflation.

Single life

This is the most popular type of annuity. It will only pay out to you, so if you die, that’s it. You can get joint life annuities if you want a partner who might outlive you to keep receiving payments after your death.

Joint life

This type pays you an income until you die, and then will pay out to your partner until they die. You can choose how much they receive as a percentage of what you received. You tend to get a lower starting rate for this type compared with a single life annuity as the insurance provider could end up paying more in the long run.

Guaranteed annuity

This isn’t so much a type of an annuity as it is an add-on to an existing annuity. You can have a guaranteed period on your annuity which means it will pay out for a certain number of years even if you die. So if you take one out today with a guarantee of 10 years, and a year from now you die, it would continue to pay out for an additional 9 years.

How do I choose the best type of annuity?

As with most things, this depends on you, your circumstances and your health. If you read through the different types above then one might seem to suit you more than others. As with anything to do with pensions, it’s important to get advice before you act.

You can also consider the following:

  • Do you want your income to rise with inflation?
  • Would you take a higher rate if it means your income won’t rise with inflation?
  • Do you have anyone that will depend on the payments after your death?
  • How much does the annuity cost?
  • How healthy are you? Do you smoke? Any medical conditions?

Will I be taxed on my annuity?

You’ll pay tax on your annuity in the same way that you pay tax on your income while working. If you get a state pension, the amount you receive from your annuity will be added to the state pension amount to work out your annual salary. This figure will determine how much tax you’ll pay.

Pros and cons of annuities

Pros

  • You can get a guaranteed income for life.
  • Your income can be protected from inflation and fluctuations in the stock market.
  • If you have poor health, you may be offered a higher rate.

Cons

  • If you die earlier than you originally thought, your dependents may lose out on the rest of your pension pot.
  • Annuities are irreversible. That means there’s no going back.
  • Your pension is no longer invested, so you wouldn’t benefit from a rising stock market.

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