Types of annuity

When you're exploring your retirement income options, you'll come across different types of annuities. It can be confusing to work out which is right for you – especially when different providers use different names for the same product.

The key thing to remember is that each type of annuity is designed to meet different needs. Some provide income for life, others for a set period. Some start paying out straight away, others later on.

In this guide, we’ll walk through the different types of annuities, how they work and when they might be worth considering, to give you a clearer picture of your options.

What types of annuities are there?

In this article, we’ll explain the most common types of annuities in plain English, including:

Canada Life offers lifetime annuity, fixed term income plan and purchased life annuity products. When you set up a lifetime annuity, you can choose a joint life option to make it a joint lifetime annuity, and you can apply for an enhanced annuity.

Lifetime annuity

A lifetime annuity uses your pension pot to provide a guaranteed, regular income that lasts for the rest of your life.

How it works

A lifetime annuity takes the money you've saved in your pension plan and converts it into guaranteed payments that you receive on a regular basis for as long as you live.

Once you've set up your policy, the terms are fixed – you can't normally change or cancel it. Your income will stop when you die unless you've chosen to include death benefits for your loved ones.

It's worth remembering that inflation will gradually reduce what your income can buy over time, unless you've opted for payments that increase each year.

Is it right for you?

A lifetime annuity could be a good fit if you:

• Are aged 55 or over with at least £10,000 in your pension pot (after taking tax-free cash).
• Are looking for peace of mind in your retirement.
• Want to know exactly how much you'll receive each month for life.

However, it won't be right if you:

• Prefer to have flexible access to your money.
• Are looking for investment growth potential.
• Want to leave a larger inheritance.

Learn more about our Lifetime Annuities and Scheme Pension

Joint lifetime annuity

Also known as ‘spouse benefit’ or a ‘joint life option’ within a lifetime annuity.

A joint lifetime annuity works just like a lifetime annuity, but with one key difference – it's designed for couples. When you die, your spouse or partner continues to receive an income, which is usually between 50% and 100% of what you were receiving.

It’s a popular choice for couples who want to know that their loved one will be financially looked after. However, because it covers two lives instead of one, it generally provides a smaller income than a single lifetime annuity.

Enhanced annuity

Also known as ‘impaired annuity’ or ‘impaired life annuity’.

An enhanced annuity is a type of lifetime annuity that can pay you a higher income if you have health problems that may reduce your life expectancy. This could include:

• Medical conditions like heart problems or cancer
• Lifestyle factors like smoking or being significantly overweight.

It works the same as a lifetime annuity, but the income is higher because the annuity provider expects to pay out for a shorter period. To find out if you qualify, you'll need to complete a health questionnaire that helps calculate whether you're eligible for the enhanced rate and how much extra income you might receive.

You may be asked to provide details such as your medical conditions, medications, or recent GP reports.

Variable annuity

Also known as ‘flexible annuity’, ‘investment-linked annuity’ or ‘with-profits annuity’.

A variable annuity is a type of lifetime annuity where your income payments can increase or decrease, depending on the performance of underlying investments (typically stocks and bonds).

Because your income is not fixed, your payments could increase if your investments perform well, but you also risk receiving less if they perform poorly. This makes it suitable for people who want the potential for growth and are comfortable with investment risk. 

Fixed term income plan

Also known as ‘short term annuity’ or ‘fixed term annuity’.

A fixed term income plan gives you a guaranteed income for a set period, with a guaranteed lump sum at the end that you can use for your retirement.

How it works

A fixed term income plan uses your pension pot to provide guaranteed payments for the period you choose. This can be anything from one to 40 years, depending on the provider. Once you've set up your policy, the terms are fixed – you can't normally change or cancel it.

At the end of the term, you receive a guaranteed lump sum. The size of your lump sum is worked out by:

• Taking the money you originally invested
• Adding the investment growth
• Then subtracting the income you've already received.
• You will receive a guaranteed income during the term you choose, followed by a guaranteed lump sum at the end

Is it right for you?

A fixed term income plan could be a good fit if you:

• Want guaranteed income for a specific period
• Want to keep your options open when the term expires.

However, it won't be right if you:

• Want flexible access to your pension pot during the term
• Need income guaranteed for life rather than a set period.

Good to know: Most providers have minimum age and investment requirements, so it’s worth checking these when you shop around.

Learn more about our Fixed Term Income Plan

Purchased life annuity 

A purchased life annuity uses a cash lump sum (rather than your pension pot) to provide a tax-efficient, guaranteed income for life or a set period.

How it works

A purchased life annuity lets you invest a cash lump sum in return for guaranteed regular payments. You can choose to receive income for a set period or the rest of your life. Once you've set up your policy, the terms are fixed – you can't normally change or cancel it.

The key advantage is that part of each payment is treated as a return of your original lump sum, so you won't pay tax on that portion – only on the interest element.

Is it right for you?

A purchased life annuity could be a good fit if you:

• Have a cash lump sum you want to turn into guaranteed income, without using your pension
• Want tax-efficient income
• Like the certainty of knowing exactly what you'll receive.

However, it won't be right if you:

• Want ready access to your money
• Are looking for investment growth rather than guaranteed payments.

Good to know: Most providers have minimum age and investment requirements, so it’s worth checking these when you shop around.

Learn more about our Purchased Life Annuity

Deferred annuity

Also known as ‘deferred income annuity’ or ‘longevity annuity’.

A deferred annuity lets you invest money now but delay taking the income until a future date. You can buy a deferred annuity with a lump sum or you can make multiple payments. Once you've set up your policy, the terms are fixed – you can't normally change or cancel it.

It could be a useful option if you're over 55 and still working, and if the additional income would push you into a higher tax band.

Immediate needs annuity 

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

An immediate needs annuity provides a regular income that covers the cost of your care, either at home or in a care home. The income is tax-free and is paid straight to your care provider. Once you've set up your policy, the terms are fixed – you can't normally change or cancel it.

This annuity is worth considering if you’re already receiving care or if you know you’re going to need it. It offers reassurance that the cost of your care is covered for the rest of your life.

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