A guide to annuities

Exploring your annuity options to provide peace of mind for your retirement


What is an annuity?

An annuity, or guaranteed pension income, is one of the ways you can use your pension pot to fund your retirement. A traditional annuity offers you the security and peace of mind of a regular and steady income, with monthly, quarterly, half-yearly or annual payments. You can use all or part of your pension to buy an annuity from an insurance company. 

You don’t need to buy one from your pension provider. In fact, it’s encouraged that you shop around for the best value for money. To find the best deal for your pension, all annuity providers must give you a ‘best in market’ comparison.

At Wesleyan Assurance Society, we’ve partnered with Retirement Line to offer our customers access to the most competitive rates in the market. To learn more, visit our annuities page.

Pros and cons of annuities

Before we explore the different types of annuity available, let’s have a look at the most common advantages and disadvantages of annuities. You can see if this option is right for your goals for retirement:

An annuity pays you a guaranteed, regular income, and once it’s set up you don’t need to manage it
Once you’ve set up an annuity, it can’t be changed, and you won’t benefit if annuity rates go up
You’ll get a secure income for life (or for a chosen period)
Your income can’t be adjusted if your circumstances change and you need more or less cash
Your income won’t be affected by stock market falls (unless you buy an investment-linked annuity)
You can’t take advantage of stock market rises (unless you buy an investment-linked annuity)
You can receive a higher income if you have certain health issues
If you choose a level income that pays an equal monthly amount, the real value of your income may erode over time due to inflation (unless you chose the inflation linked option within your annuity)

What are the different types of annuities?

There are various types of annuity, giving you the flexibility to find one that’s right for you. It’s important that you think hard about your decision and consider seeking advice from a Specialist Financial Adviser from Wesleyan Financial Services.

Lifetime annuities

A lifetime annuity provides you with a regular retirement income for life. How much you’ll get depends on how much of your pension pot you use to purchase an annuity, and factors that may affect the rate offered to you. This includes your life expectancy and other personal circumstances.

You should also bear in mind that market conditions at the time you purchase an annuity will have a big impact on the annuity rate.

With most lifetime annuities, you’ll be offered a higher income (annuity rate) the older you get. So, if you have other income streams to support you during the early years of your retirement, it may be worth holding out to get a better deal. However, this doesn’t consider the rise and fall of annuity rates in general, so there could be a cost to delaying a purchase if rates fall.

There are two types of lifetime annuities:

  • Lifetime annuities
  • Investment-linked annuities

A lifetime annuity allows you to set your income in advance. This gives you control over your income throughout retirement. You can purchase a single life annuity which covers yourself, or a joint life annuity that also provides a lifelong income for a dependant or nominated beneficiary if you pass away.

You can add some additional security for your loved ones by adding a guarantee period to your annuity. This will provide your nominated beneficiary with an income if you die within a chosen number of years after starting your annuity. 

For example, if you set up a five-year guarantee period and die after two years, they’ll receive an income for the remaining three years.

Once you have one set up, it can’t be changed or amended so it’s important to make sure an annuity is the right pension option for you.

Investment-linked annuities

An investment-linked annuity is another type of lifetime annuity that offers you a lifelong income. In this case, the income fluctuates depending on investment performance. You can select an amount of guaranteed income using part of your pension pot and an additional income that’s based on investment returns.

As with all investments, the value of your annuity can go up and down and you may get back less than you put in. It can be a good way to potentially get a higher income than a basic lifetime annuity, however it does come with the risk of losing some of the money that you put in.

As with a lifetime annuity, you can choose from a single or joint annuity, and add guarantee periods or value protection if it suits you.

Temporary annuities

A temporary (fixed term) annuity is a type of annuity that only pays out for a set period. They can be useful if you don’t wish to use all your pension pot or you want more time to consider your retirement options. If you pass away before your payment period ends, you can nominate a beneficiary to receive the remainder of payments in your annuity.

As they’re paid for less time than a lifetime annuity, you’ll likely receive a higher annuity rate. While you’ll likely benefit from a higher annuity rate, you won’t reap the potential benefits of investing your income over time, as you would with a lifetime investment-linked annuity.

Enhanced and impaired life annuities

If you have a lower life expectancy than the average of a person your age, you may be eligible for an enhanced or impaired life annuity.

Enhanced annuities may offer higher rates and income than a lifetime annuity and are suited for people who are at a greater risk of a premature death. For example, if you’re overweight, smoke, or have worked in a hazardous environment.

Similarly, impaired life annuities offer you an annuity rate based on an estimate of your personal life expectancy. They’re for people who have a reduced life expectancy as a result of a current or previous medical condition.

You will have to meet certain criteria when you apply for one of these annuities. You can discuss this with your annuity provider or a Specialist Financial Adviser from Wesleyan Financial Services.

Alternatives to annuities

If you aren't sure if an annuity is right for you then our comparison table will give you an overview of the different ways you can take your pension:

Annuities Taking your whole pot as cash Cash lump sums Drawdown
Provides a regular income?
Provides a secure income for life?
Allows you to change your income?
Is your remaining pot still invested?
Affected by the stock market?
Can it provide an income for a dependant?
Can I take my pension from age 55?

This table is an illustration of your possible pension options. The options available to you will depend on your individual circumstances, including the type of pension you have.

Frequently asked questions

  • Where can I buy an annuity?

    Before you reach retirement age, your pension provider will probably send you an annuity quote. You don’t have to buy an annuity with your pension provider, and it’s normally a good idea to shop around. You can book an appointment with a Specialist Financial Adviser from Wesleyan Financial Services, who will work with Wesleyan Assurance Society to give you access to the most competitive rates in the market (provided by Retirement Line).

  • Can I still contribute to my pension if I purchase an annuity?
    Yes, you can still add to your pension if you’ve purchased an annuity. You can keep building your pension pot and get tax relief on your contributions up to the annual allowance. You can also take out a new pension if you prefer.
  • Can I change my mind once I’ve bought an annuity?
    Life policies (including pension annuities like a lifetime annuity purchased using pension savings) have a mandatory 30-day cancellation period. However, most providers won’t let you amend or cancel your annuity once this time is passed. That’s why it’s important to be sure of any decision you make regarding your pension and seek advice from a financial professional if you’re unsure about whether an annuity is right for you.
  • Can I cash in my annuity early?
    It’s highly unlikely that you can cash in your annuity early, if at all. Most annuities can’t be changed once they’ve been set up. This includes the amount of income you’ll receive and when you’ll receive it.
  • How are annuities taxed?
    Any income you receive from your annuity that goes above your personal allowance is taxable. The amount you’ll pay in tax will depend on your income tax rate. If you’re a basic-rate taxpayer, you’ll be taxed 20% on your annuity income. 
  • What happens to my annuity when I die?

    If you have a standard single-life annuity, then your pension payments will stop when you pass away. If you have a joint annuity, value protection or a guaranteed period on your annuity, then the rules are different, depending on whether you die before or after the age of 75.

    If you die before age 75:

    • Your joint annuity income will be paid to your beneficiary tax-free for the remainder of their life.
    • If you have a value-protected annuity, then any lump-sum payments you’re owed will be paid tax-free.
    • If you die during a guarantee period, then your remaining annuity payments will be passed on tax-free to your beneficiary until the end of that period. However, it could be subject to Inheritance Tax (IHT).

    If you die on or after age 75:

    • Your joint annuity income will be added to your beneficiary’s income but will be subject to normal tax. This also applies to any income covered under a guarantee period.
    • If you have a value-protected annuity, then any lump-sum payments you’re owed will be added to your beneficiary’s income for that year and taxed as normal. They could also be subject to Inheritance Tax (IHT).

    Tax treatment depends on the individual circumstances of each customer and may be subject to change in future.

You might be interested in…


Looking to purchase a stable income for your retirement? We’ve partnered with Retirement Line to bring you a range of annuities.

Taking a flexible pension income

Take income directly from your pension as and when you need it with flexi-access drawdown and enjoy the freedom of dipping into your pension pot.

Taking a cash lump sum from your pension

Get access to your entire pension pot by taking all or some of your pension fund as cash lump sums. The first 25% is tax-free, but you will have to pay income tax on the rest.