Types of annuity
An annuity gives you a guaranteed regular income for as long as you live in exchange for your pension savings. The amount that you are regularly paid will depend on a number of factors, and there are several different types of annuity available, so be sure to pick the right one for your circumstances.
What types of annuity are there?
Overall, there are three main types of annuities: lifetime annuities, investment-linked annuities and fixed-term annuities.
A lifetime annuity is a guaranteed income for the rest of your life – and for your spouse or dependants after your death if you include them when you take out an annuity. Once you’ve purchased a lifetime annuity, there is no risk associated with investment performance, and lifetime annuities come in two 'flavours' – standard annuities and enhanced annuities.
Investment linked annuities
An investment linked annuity is a product that's used to reinvest some or all of your pension pot, and where your income will vary according to changes in the value of its underlying investments – for instance any changes to relevant share prices. The benefit to these types of annuities is that if the investments perform well, your income could go up. But the downside is that if stock markets fall, there is a risk your income will fall – although some products available limit this risk.
Find out more about the different types of investment linked annuities
Fixed term annuity
Fixed Term Annuities are actually a type of drawdown arrangement, which gives you an opportunity to keep your options open in case your circumstances change later in retirement.
In return for investing in a pension fund from an existing pension scheme, a fixed term annuity pays a fixed level income for a specific period of time – typically about five years. After that point in time, you can usually choose to reinvest remaining funds in an alternative product.
OK, what should I do next?
If you want to know a bit more about annuities and how they work, why not take a quick look at the short film below.
If you are interested in any one of these annuities and how they can give you an income, then we recommend you speak to a professional adviser. You'll find professional financial advisers who are local to you on thepfs.org and unbiased.co.uk.
Alternatively, if you're looking to purchase a lifetime annuity, HUB Financial Solutions - part of the Just Group - offers a lifetime annuity comparison service, that could help you make sense of this option.