If you’ve heard of the benefits of pension annuities but aren’t entirely sure how they can help you, then this guide to will iron out the details. Use Pension the Pennies’ Pensions Help Centre to help you make important decisions on how to manage your pension annuities. 

What is a pension annuity?

An annuity is an optional add-on for your pension that you can purchase from an insurance company. The main purpose of a pension annuity is to make your pension go that bit further by giving you an additional taxable guaranteed income for life. In short, it’s like having insurance for your retirement.

Why would I buy a pension annuity?

If you are unsure if your pension will provide you with enough money to live comfortably when you retire, then using a percentage of your pension pot to purchase a pension annuity is an option worth considering. Similarly, if you don’t think your pension will last for as long as you’ll need it – a pension annuity could be the way forward.

How is annuity calculated?

When purchasing an annuity, the provider will always look at a certain set of factors to calculate how much income you will get each year from your annuity. For most providers, your annuity will be calculated based on:

  • Your age
  • Your lifestyle and health
  • The size of your pension pot
  • Annuity rates at the time of purchase
  • The type of annuity and add-ons that you buy

To get an estimate on how much your guaranteed income will be, try this annuity calculator. We always recommend shopping around when it comes to buying a pension annuity – there are so many options and types of annuity available that it’s worth seeing what different companies could offer you. 

Types of annuity

Choosing which type of pension annuity to go for can be a daunting task with so many options available. Single or joint life annuity? Fixed-term or short-term? These are the decisions that you’ll have to make when picking your pension annuity scheme but don’t worry – we’re here to help break down your options.

What is a single life pension annuity?

This is a popular option for many. A single life pension annuity is one of the more common types of annuity and is simple to define. It means that your pension annuity will be paid just to you – no one else. A single life pension annuity can be set for life or for a fixed number of years.

What is a joint life pension annuity?

Want to make sure your partner or spouse is still able to live comfortably when you’re not around anymore? A joint life pension annuity ensures that your annuity payments carry over to your partner after you die.

Fixed-term annuity

Choosing a fixed-term annuity means that you will be paid an income for a set number of years. Once the fixed-term is over, you will receive a guaranteed sum for you to use as you see fit. However, it’s common for people to invest this sum or use it to purchase another annuity if necessary. 

Short-term annuity

Short term annuities are only paid for a period of up to 5 years, or when you die – whichever comes first.

Further guidance for pension annuity

As this is such a broad area with a multitude of options to choose from, we recommend shopping around to find the right type of pension annuity for you. The government’s overview on pension annuity is a fantastic place to start, giving you a full rundown of the different types of annuity. It also gives details on the tax and risks of purchasing a pension annuity and much more.