Annuities glossary

  Annuity

An annuity is a product that turns money from your pension or savings into a guaranteed regular income. You can choose for this income to last for your whole life or for a fixed number of years.

Lifetime annuity

An annuity that uses your pension pot to provide a guaranteed, regular income that lasts for the rest of your life. This means your income will not run out, even if you live longer than expected.

Fixed term income plan

A financial product that works similarly to an annuity. It gives you a guaranteed income for a set number of years (from 1 to 40). At the end of the term, you receive a guaranteed lump sum, which you can use however you choose, including buying another retirement product.

Purchased life annuity

An annuity bought with a cash lump sum that provides a tax-efficient, guaranteed income for life or a set period.

Joint lifetime annuity

An annuity that continues to pay an income to your spouse or partner after you die.
Also known as ‘spouse benefit’ or a ‘joint life option’ within a lifetime annuity.

Enhanced annuity

An annuity that pays you a higher income if you have health conditions or lifestyle factors that may affect your life expectancy. 

Immediate need annuity

An annuity that provides regular income straight away to help cover care costs, either at home or in a care home.

Also known as ‘care fee’ or ‘immediate care plan’.

Deferred annuity

An annuity where you invest money now but delay taking the income until later, allowing your investment to grow in the meantime.
Also known as ‘deferred income annuity’ or ‘longevity annuity’.

Variable annuity

An annuity where your income payments can go up or down based on how well the underlying investments perform, rather than providing a fixed amount each time.
Also known as ‘flexible annuity’, ‘investment-linked annuity’ or ‘with-profits annuity’.

Guaranteed income 

The fixed amount of money your annuity will pay you regularly, which is agreed when you set up your policy and won't change.

Guaranteed payment period 

A set period during which your annuity will continue paying out, even if you die – ensuring your chosen beneficiaries receive income for this period.

Guaranteed Maturity Value

The guaranteed lump sum you'll receive at the end of the term with a fixed term income plan.

Open Market Option 

Your right to shop around and compare annuity rates from different providers with the rate offered by your pension provider.

Death benefits 

The income or lump sum that your chosen beneficiaries will receive after you die.

Value protection 

This option returns some or all of the money you originally invested for your annuity to your beneficiaries when you die (minus any income already paid to you).

Also known as 'annuity protection'.

Level annuity 

An annuity that pays you the same amount of income every year throughout the term, providing predictable payments.

Escalating annuity 

An annuity where your income increases each year, either by a fixed percentage or in line with inflation, helping to maintain your spending power over time.

Defined contribution pension

A pension where you and/or your employer pay in regular contributions. The final amount in your pension pot depends on how much has been paid in and how your investments have performed.
Also known as ‘money purchase scheme’.

Learn more about defined contribution pensions and how these differ to defined benefit pensions.

Defined benefit pension

A workplace pension scheme where your employer pays you a set income in retirement, usually based on your salary and how long you’ve been in the scheme.
Also known as ‘final salary pension’.

Learn more about defined benefit pensions.

Drawdown

A way of taking money from your pension pot while leaving the rest invested, giving you flexible access to your retirement savings as and when you need them.

Learn more about annuities vs. drawdown

Lump sum 

A one-off amount of money that can be paid into, or taken out of, your pension pot.

Retail Price Index (RPI)  

A measure of inflation that tracks how the cost of everyday goods and services changes over time.

Interest rates 

The cost of borrowing money, set by the Bank of England, which affects annuity rates – when interest rates are higher, you'll typically get a better income from your annuity.