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Candid Money Guide to: Buying a pension annuity

Once you reach age 55 you have the option to swap your pension for an income for life. While this is arguably one of the biggest financial decisions any of us ever have to make, it’s one that many people make blindly. And a bad decision could be a very costly one that affects you for the rest of your life.

If there’s one golden rule it’s never accept the annuity quote given by your existing pension provider(s) without checking its competitiveness. Chances are it won’t be the best deal and even just a few minutes on the web could net you a better deal worth thousands of extra pounds over your lifetime. The exception is if you're fortunate enough to benefit from a 'guaranteed' annuity rate set some years ago, in which case it'll likely be very attractive.

You might even decide that an annuity is a bad idea altogether, although drawing an income from your pension instead is not always a better option.

Action Points

1. Do you need income now or can you wait?

Just because you’ve reached the retirement age specified on your pension plan you don’t necessarily have to take income straight away. This may not be an option if you need a retirement income now, but leaving the pension invested means you might get a higher pension in future. However, delaying is not without risk - even if you invest the pension fund cautiously you could still end up worse off if annuity rates fall, plus you’ll miss out on income meanwhile which could more than offset any benefit.

Take a look at our pension delay calculator to get a feel for whether delaying might be worthwhile.

2. Decide whether buying an annuity or drawing an income will be the best option

Instead of buying an annuity you can instead leave your pension invested and draw an income – known as an ‘unsecured’ pension (you can subsequently buy an annuity at any time). The attraction of drawing an income is being able to vary income to suit your needs and/or potentially bide time if you believe annuity rates will improve in future. However, long term income will depend on investment performance, which means risk, and you’ll probably need advice which will cost. Read more about alternatively secured pensions on our annuities page.

3. Take tax-free cash

You can take a quarter (25%) of your pension fund tax-free, regardless of whether you opt for an annuity or alternatively secured pension. Given the money would otherwise be taxable if taken as income it almost always makes sense to take this tax-free lump sum.

4. Decide which annuity options are worthwhile

When buying a pension annuity there are a range of options to choose from. The most common are:

  • Single/Joint life – Buying a joint life annuity means your spouse will receive an income (typically 50-100% of your annuity income) if you die before them. Expect this option to reduce the annuity income you receive by around 10-20%.
  • Guarantee – You can choose a period, usually 5 or 10 years, that your annuity is guaranteed to be paid for if you die meanwhile. Usually makes negligible difference to the rate you receive.
  • Rising income – Linking your pension annuity income to inflation protects your purchasing power, but don’t be surprised if this option reduces your initial annuity income by 40% or more compared to a level annuity. Use our level vs index-linked calculator to compare.
  • Frequency – Choose whether you want income paid monthly, quarterly or annually.
  • Advance – You can have income paid at the beginning or end of your selected period.

5. Do you qualify for enhanced rates?

If an insurer expects your lifespan to be shorter than average due to illness, they'll usually offer you a better annuity rate to reflect this (called an 'impaired life' annuity).

If you're a smoker or overweight you might also receive a better rate than normal (an 'enhanced' annuity), for similar reasons. The rate for smokers could be 20% or more higher than that for non-smokers.

6. Get a feel for competitive rates

The Money Advice Service (MAS) Website offers a useful pension annuity comparison table. Simply enter your details and view the standard rates offered by a range of providers. You might get a better rate still by shopping around a few brokers/advisers, but using the FSA site gives you a good benchmark against which to compare.

7. Shop around for the best deal

Unfortunately hardly any discount brokers offer an annuity service. Pension company administration is generally a pain to deal with and I get the feeling most discount brokers view pension annuities as being more hassle than they’re worth.

So this is one area where taking advice needn’t end up costing much more, although you can probably still make some savings from online services that offer small discounts.

Pension annuities typically pay a one-off sales commission of 1% (of the annuity purchase price) to advisers and brokers.

Quote Comparison (All links unpaid)

To give you a feel for how quotes can vary I obtained pension annuity quotes from several brokers using the following assumptions: Couple aged 65, non-smokers in good health, with the male buying a level annuity for £100,000, 50% spouse income and a 5 year guarantee. Income paid monthly in arrears.

BrokerAnnual Income (best quote)InsurerNotes
MAS Website
(for comparison)
£6,168 Saga (Legal & General) Best rate.
FSA Website
(for comparison)
£5,256 Scottish Widows Worst rate.
Moneyworld £6,415 Canada Life Waives some commission to enhance rate.
Alexander Forbes Annuity Bureau £6,338 Aviva Online annuity supermarket.
Hargreaves Lansdown £6,252 Legal & General Offers a price promise to try and beat other quotes.
Burrows & Cummins £6,219 Canada Life Advice given.
Annuities Online £6,219 Aviva Advice given.
Annuity Discount Brokerage £6,151 Canada Life Waives some commission to enhance rate.
All quotes obtained on 9 June 2010.


Do I have to buy an annuity from my existing pension provider?

No! You’re free to shop around for the best deal.

At what age can I buy an annuity?

You can take pension benefits from age 55. This means either buying an annuity or drawing income via an ‘alternatively secured’ pension.

Can I change annuity options once purchased?

No, once purchased that’s it, the annuity will paid the agreed level of income for life.

What are investment annuities?

You can link your annuity income to investment performance (via a 'with-profits' or 'unit-linked' fund). Charges are likely to be higher than a standard annuity and this approach means taking risk, so it's hard to find a sensible reason for buying one. Be warned that these annuities usually pay advisers more commission than a standard annuity, giving the less scrupulous ones an incentive push this option.

What affects annuity rates?

Aside from the various options detailed in (4) above and life expectancies, the biggest factor affecting annuity rates is the price of gilts (which, in turn, is affected by interest rates and/or inflation). This is because insurers usually buy gilts (and/or high quality corporate bonds) to ensure they can pay the annuity income they've promised you (index-linked gilts in the case of inflation-linked annuities).

Rising interest rates and/or inflation tends to reduce the price of gilts, which is good news for annuity rates (and vice versa when interest rates/inflation falls).

Useful Links

Read more about taking an income from your pension on our Annuities page.

Use our Pension Delay Calculator to estimate the implications of delaying your pension.

Use our Level vs Index-Linked Annuity Calculator to see how each option might affect your long term income.

Use the MAS Comparative Tables to get benchmark annuity rates.

© Candid Money Limited 2012.