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Guide to Annuities
UK Pensions

Pension Annuities

There is a large market in the UK for Pension Annuities, also known as Retirement Annuities.

The table below outlines the most common types of UK pension annuities:

Pension Annuity Type
How it works
Single Lifetime Annuity
Also known as a conventional pension annuity. Purchased from a life insurance company with the proceeds from a pension fund and put into fixed investments. Provides secure, guaranteed, risk free income for the life of the annuitant, however long they live. The annuity policy stops when the annuitant dies with no further payouts.

Temporary/short term annuity
Also known as phased draw-down, works the same as a conventional pension annuity but you only use part of your pension fund to buy the annuity. Income is paid for a fixed period of of up to 5 years or up to age 75 whichever occurs first. Income payments can be level or increase each year at a fixed rate or in line with the Retail Price Index. Suits people who want to delay buying a lifetime annuity.
Investment linked - Variable
A combined annuity which is partly a fixed conventional annuity policy and partly an investment linked annuity. Income is partially guaranteed with the possibility of increasing but not as secure as a conventional annuity. Flexible options as your needs and dependants’ needs change.
Investment linked - Unit Linked
A lifetime annuity but your pension fund is invested in units in investment funds, annuity income is linked directly to how well the funds you have invested in perform. You can usually choose the types of investment funds from:
  • Medium-risk managed fund - broad range of various different shares and other investments to spread money and reduce risk.
  • Higher-risk managed fund - various shares and other investments in a particular sector, such as smaller companies. Money is less widely spread so risk is higher.
  • A tracker fund - closely follows the performance of a particular stock market related index. Usually has lower charges than managed funds.
The more risky the underlying fund selected, the more income may vary, up and down. This is a medium to high risk annuity.
Investment linked - With profits Combines an income for life with investing in the stock market. Income can go up and down depending on investments selected, but this annuity guarantees income will never fall below a certain minimum level over the longer term. Investment growth can keep income higher than inflation. This annuity is low to medium risk, but more complex than other options.
Investment linked - Flexible Provides an income for life but provides more flexibility and control over income, than other annuity options. For example, funds can stay invested in chosen investment funds until you are aged 80 years or over. Income is linked to performance of selected funds and isn’t guaranteed. Annuity income in future years could be lower than the amounts at start.

Protected Rights Annuity
If you contract out of the Additional State pension, and put National Insurance (NI) rebates into a personal pension fund, you must use that part of that pension fund to buy a protected rights annuity. Your pension provider can tell you if protected rights applies to you and what it might mean in your circumstances. You will usually have to buy a joint-life annuity paying a 50% spouse’s pension benefit if you are married or have a civil partner. You can choose between taking level annuity payments or an escalating income.

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Guide Contents

What is an Annuity?
When might I need an annuity policy?
Types of Annuities
Pension annuities
Annuity income options
Enhanced and Lifestyle Annuities
Impaired Life Annuities
Annuity Rates
FAQs
Where can I go to get more help?

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