An annuity is a type of insurance policy that provides you with a regular income in exchange for a lump sum – usually your pension pot.
When do I need to buy an annuity? There is no simple answer to this question, because it depends so much on your particular situation. And now that under new government rules you don't have to buy an annuity by age 75, there is no deadline for this decision.
However, it is a good idea to consider buying an annuity when you want to ensure that you have a known level of guaranteed income.
When you buy an annuity, your pension fund is no longer invested by a provider on your behalf. You have sold it in return for a guaranteed lifetime income. That means you no longer have the opportunity to grow your pension fund with your contributions and its investment performance. It is important to be sure that you are making that commitment at the right time and the best way to do this is to speak to a financial adviser.
What determines my annuity income? The amount you receive as an annuity will depend on a number of factors, but will largely be based on how long the annuity provider expects you to live – and how long they will have to pay you an income.
It pays to shop around because rates will differ from company to company, so do consider the Open Market Option, and whether you might qualify for an enhanced annuity - a higher income for people with health and lifestyle conditions that might shorten their life expectancy.
Also, remember that annuity payments are taxable as pension income, so you need to factor the impact of tax on your income into your calculations.
EU gender legislation They will also take into account your age, the size of your pension pot and whether you are male of female – although recent EU legislation has ruled that factoring in gender in insurance company calculations is discriminatory so from late 2012, insurance companies will no longer be able to do this.
Please read about the types of annuity available.
Useful links Find out about our enhanced annuities
Find out about our Fixed Term Annuity
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