03 May 2024

If you’re looking for a guaranteed retirement income, an annuity could be the right choice for you. But there are many different types of annuity. In this article, we’re going to explain them, covering:

  • Lifetime annuities
    • Joint lifetime annuities
    • Enhanced annuities
  • Deferred annuities
  • Variable annuities
  • Immediate needs annuities
  • Purchased life annuities

We start with lifetime, joint lifetime and enhanced annuities because they’re the only annuity types that we offer. And because we have a separate fixed term annuity article we’ve left them off the list.

What is a lifetime annuity?

Lifetime annuities (which some people call a life annuity) regularly pay out a guaranteed amount of money for the rest of your life. You agree the amount when you buy one. You’ll also decide how often you’ll get it and whether you want to go for other product benefits, like the payments going to a loved one if you die.

Once you’ve bought an annuity, you can’t change the amount you get or cancel it. That’s why it’s very important to make sure you choose the right one by shopping around and getting financial advice. The total amount it pays out will depend on how long you live. You might get back more or possibly less than you originally paid for it. If you choose death benefits such as Value Protection, you can guarantee that the initial amount you paid for your annuity is covered.

What is a joint lifetime annuity?

A joint lifetime or joint life annuity is a lifetime annuity that keeps paying out to a loved one (usually a partner) after the first recipient dies. That’s often called a spouse benefit option. You’ll choose what proportion of your annuity it keeps paying out when you set it up.

What is an enhanced annuity?

An enhanced annuity is an annuity that pays out at a higher rate because it’s for someone with particular health or lifestyle issues. Our enhanced annuity article explains how that can work.

Annuity vs. Drawdown

Annuity and drawdown are two of the most common ways of taking a regular income in retirement. Learn more about them in our article and see if either or both are right for you.

What is a deferred annuity?

A deferred annuity (aka deferred income annuity) lets you delay the start date of your annuity payments by a year or more. You can buy deferred annuities with a single lump sum or several payments. Deferring your annuity income can be useful if you’re still earning now and more money coming in would push you into a higher tax band.

Before your payments begin, your provider will probably invest your money. You’ll get an agreed rate of interest on it, with the exact amount depending on your age and how much money you’ve paid in. If your provider’s investment strategy works out its value could grow. Though of course, as with any investment, there’s always the risk that its value could go down too.

What is a variable annuity?

Also known as flexible annuities, investment annuities or with-profits annuities, variable annuities give more control over your money than you get with other kinds of annuities. You can change how much they pay out and how your money’s invested.

What is an immediate needs annuity?

An immediate needs annuity gives you a regular income to cover the cost of care at home or a move to a care home. The money it pays out will be tax-free if it goes straight to a registered care provider. Because an immediate needs annuity pays out for the rest of your life, it can provide important reassurance that your money won’t run out when paying for long term care needs.

If you’re thinking about buying an immediate needs annuity, it’s worth remembering that your care costs might well increase over time. You might be able to take one out with increasing payments. If you choose not to do that, make sure you have other sources of income in place to cover any cost increases. And if you’re not sure what sort of future care costs you might have to cover, our care costs calculator can help.

As a footnote, be careful not to confuse immediate needs annuities with immediate annuities. An immediate annuity is a type of annuity that you can only get in the US.

What is a purchased life annuity?

A purchased life annuity is an annuity that you buy with money that doesn’t come from a pension pot. So you could use money from a house sale, your savings or inheritance. Apart from that, it’s a lot like other kinds of annuity. So for example you’ll get a guaranteed income for life and you can pass that income on to a loved one if you die.

What should I do next?

It’s really important to have a good understanding of all the different annuity types, and the different ways they can help you meet your retirement needs and goals, before you choose one. If you’re not sure about them, it could be worth:

  • booking a free appointment with Pension Wise, an impartial guidance service from MoneyHelper
  • finding a financial adviser at Unbiased, though you’ll probably have to pay for their advice

You can find out more about our own annuity on our annuities page. And you can use our annuity calculator to see how much different types of annuity could pay out to you at different ages.

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