What is an annuity?

An annuity is a financial product that provides a guaranteed, regular income for life or a set period. You can buy one using your pension or savings. Different types of annuities offer different levels of flexibility, guarantees and payment options, so it’s important to choose one that fits your needs.

An annuity can offer financial peace of mind for your retirement. It’s a low-risk investment that gives you steady cash flow for as long as you need it, so you don’t need to worry about running out of money.

How does an annuity work?

When you buy an annuity, you pay a lump sum to a provider in exchange for a guaranteed income. Once the income level is set, it will not change unless you choose an option that increases it over time.

You can choose how often the income is paid into your bank account:

• Monthly
• Quarterly
• Half-yearly
• Annually

You can also control whether your income stays the same for the rest of your life (or the set period), whether it increases each year or varies in line with inflation.

Buying an annuity with your pension

You can buy an annuity using some or all of your pension pot once you’re 55 years old. This is set to rise to 57 in April 2028.

Before you buy, you can take up to 25% of your pension pot as a tax-free lump sum. The remaining amount is converted into income, which is taxed as earnings.

Buying an annuity with savings

You can buy an annuity with a cash lump sum from your savings. This type of annuity is called a Purchased Life Annuity.

The income you receive is split into two elements:

• The capital element is a return of the original lump sum you paid and is free from tax.
• The income element is any income beyond the original lump sum, such as interest. This is taxed as savings income.

Benefits of an annuity

• Guaranteed income
  You’ll have a regular, predictable income stream, providing financial security and stability. 
• Peace of mind for life
  You choose a lifelong annuity, your income will continue for as long as you live, giving protection against running out of money.
• No hidden costs or hassle
  All charges are included in the income you receive, so you won’t be asked to pay anything extra later on.

What are the downsides of annuities?

• No automatic death benefits
  Your income normally stops when you die, unless you choose death benefit options at the start.
• Lack of flexibility
  Once your annuity’s set up, you can't choose to take more or less – even if your circumstances change.  
• Fixed contract
  Once set up, you cannot cancel or change an annuity if you change your mind.

What types of annuity are available?

Lifetime Annuity

A popular option for people with a pension who want peace of mind in retirement.

• Receive a guaranteed income for life
• Option for your income to increase over time
• Choose from a range of death benefits
• Access your tax-free cash

Learn more about our Lifetime Annuity

Purchased Life Annuity

A tax-efficient way to invest a cash lump sum for a set period or for life.

• Guaranteed income for life or a fixed period
• No tax on income up to the original amount you paid for your annuity
• Option to pay benefits on death
• Choice of income frequency

Learn more about our Purchased Life Annuity

Fixed Term Income Plan

Not technically an annuity, but it works similarly, providing income for a set period.

• Receive a fixed, regular income between 1 and 30 years
• Get a guaranteed lump sum at the end of the term
• Lump sum death benefit for beneficiaries
• Reassess your retirement needs at the end of the term

Learn more about our Fixed Term Income Plan

Pension and non-pension annuities

A pension annuity is one that you buy using some or all of your pension pot. You must be at least 55 to buy a pension annuity (rising to 57 in April 2028). Types of pension annuities include Lifetime Annuity and Fixed Term Income Plan.

A non-pension annuity is one that you buy with money that’s not in your pension pot. You don’t have to wait until pension age to buy a non-pension annuity, but providers have their own minimum age limits. For example, our Purchased Life Annuity is a non-pension annuity that you can buy if you are at least 35 years old.

You can find out more about the different types of annuities here. 

Is an annuity the same as a pension?

An annuity is not the same as a pension. A pension is the account you save into throughout your working life, while an annuity is a product you can buy using those savings to provide regular income during retirement.

Do you pay tax on an annuity?

Yes, annuity income is normally taxed as earned income. You can usually take up to 25% of your pension pot tax‑free before buying an annuity, and tax only applies to the income you receive above your tax‑free personal allowance. You can find out more about your tax free allowance at gov.uk.

Is an annuity a good investment?

Whether an annuity works for you depends on your personal circumstances. Your income needs, family situation and retirement goals all play a part in determining if an annuity fits your plans.

For some people, the certainty of regular payments makes an annuity an attractive choice. Others might prefer the flexibility of keeping their pension pot invested, even though this comes with more risk.

You don't have to choose one or the other – you can split your pension pot, putting some into an annuity for guaranteed income and investing the rest for potential growth.

Learn more about annuities

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