A lifetime annuity is a type of retirement income product that you buy with some or all of your pension pot. It guarantees a regular retirement income for life. Lifetime annuity options and features vary – what is suitable for you will depend on your personal circumstances, your life expectancy and your attitude to risk.
How a lifetime annuity works
You choose to take up to 25% of your pension pot – or of the amount you are allocating to buy an annuity – as a tax-free lump sum. You then use the rest to buy an annuity, which will provide you with a regular income for life.
This retirement income is taxed as normal income. As a rule of thumb, the older you are when you take out an annuity, the higher the income (annuity rate) you’ll get.
There are two types of lifetime annuity to choose from:
• Basic lifetime annuities – where you set your income in advance
• Investment-linked annuities – where your income rises and falls in line with investment performance, but will never fall below a guaranteed minimum
Basic lifetime annuities
Basic lifetime annuities offer a range of income options designed to match different personal circumstances and attitude to risk.
You need to decide whether you want:
• One that provides an income for life for you only – a single life annuity, or one that also provides an income for life for a dependant or other nominated beneficiary after you die – called a ’joint-life annuity’
• Payments to continue to a nominated beneficiary for a set number of years (for example, 10 years) from the time the annuity starts in case you die
unexpectedly early – called a ’guarantee period’
• ‘Value protection’ – less commonly used, but designed to pay your nominated beneficiary the value of the pot used to buy the annuity less income already paid out when you die
Your choices affect how much income you can get, and where you expect to live when you retire may also affect how much income you get.
Higher income for medical conditions or unhealthy lifestyle If you have a medical condition, are overweight or smoke, you may be able to get a higher income by opting for an ‘enhanced’ or ‘impaired life’ annuity. Not all providers offer these so be sure to shop around if you think you might benefit from one.
Remember, a lifetime annuity is just one of several options you have for taking a retirement income.
