Guide to Buying an Annuity

Why Buy an Annuity?

If you’ve saved up a significant pension pot, one option for using it is buying an annuity. An annuity guarantees a regular income either for the rest of your life or for a fixed term.

Do I Have to Buy an Annuity?

You are under no obligation to purchase an annuity. As a member of a defined contribution pension scheme, you have many options for your savings. For example, you could choose to close your pension pot and receive all your cash in one lump sum.

How to Buy an Annuity

Undoubtedly, your pension provider will offer you an annuity – a direct income. However, you don’t necessarily have to stick with your pre-existing pension provider.

It’s your decision: take your annuity from your pension provider or shop around and see if other providers offer you a better deal. Financial advice from the experts at Prosperity Wealth might be useful at this point.

Buying an Annuity for Retirement in the UK

When buying annuity in the UK, you should go through the following steps:

  • Receive an information pack from your pension provider before your retirement date. Your provider will share the annuity types available and the deals they can offer you.
  • Take financial advice. Although this isn’t a mandatory step, it’s an advisable one. Most reputable providers will ask you to take advice before they provide you with a quote.
  • Ask for a personalised illustration. Once you have a potential annuity provider, you can ask for a personalised illustration which includes a quote and your options.

Do I Have to Buy an Annuity with My Pension?

Although the money to buy an annuity generally comes from a pension pot, it is possible to buy one using money from other sources. The advantage of using your pension is that you enjoy tax relief and tax-free growth on it.

Can I Buy an Annuity with Savings?

In theory, you absolutely can use your savings to buy an annuity. However, in practice, there may be more effective ways to generate an income.

If you buy an annuity at a young age to last you the rest of your life, you’d need to have very significant savings to generate a decent annual income.

Should I Buy an Annuity for Retirement?

It’s up to you whether you buy an annuity for retirement. If you want a guaranteed stable income after you retire and potentially for the rest of your life, this could be a great option for you.

There are two common types of annuities:

Lifetime annuities

These offer a fixed income for the remainder of your life.

Investment-linked annuities

These pay out regular income that isn’t fixed. It can rise and fall within certain limits.

Both offer a certain level of stability; however, you will have to sacrifice a degree of flexibility. Once you commit to an annuity, you can’t change your plan.

One option is to spend just a part of your pension on an annuity. The rest you could take as a tax-free lump sum or leave in your pension to grow further.

Advantages of Buying an Annuity

Receiving a lifetime income

  • With a lifetime annuity, you’ll receive income no matter how long you live. It never runs out.


  • As long as your annuity isn’t investment based, you’ll be able to count on a fixed figure every month.

Protection against inflation

  • Many providers agree to increase pay-outs according to inflation.

Protection for families

  • With a value protected annuity, your family will receive an income up to an agreed amount after your death. This is a more expensive annuity, though.

When to Buy an Annuity for Retirement

Providers offer the option of annuity to people within the age bracket of 55 and 75, but the higher rates are reserved for older people. If you buy one too early, you’ll have to rely on it for longer, meaning you may receive a lower income, or you’ll have to pay a lot more into it.

When deciding the right time to buy an annuity, think about when you want to retire, how much money you’ll need, and how much you can afford to pay into one.

Where Should I Buy an Annuity?

You can buy annuities from insurance carriers, dedicated annuity distributors, independent broker-dealers, large banks, mutual fund companies, and independent agents, brokers, and financial advisors. Rather than simply accept your pre-existing pension provider’s offer, it makes sense to shop around for the best possible deal.

What Is the Best Annuity to Buy?

Before committing to an annuity, check out the four basic types: immediate fixed, immediate variable, deferred fixed, and deferred variable annuities. The ideal one for you will depend on when you want to start receiving payments and how you want your annuity to grow. For example, an immediate annuity offers a lifetime guarantee – a fixed income for as long as you live.

Annuity Purchase Rates

The cost of an annuity considers factors such as age and gender, just like insurance does. Usually, the annuity purchase rate for a fixed annuity is lower than for a variable rate annuity.

Purchased Life Annuity Rates

The annuity purchase rate has an impact on the the annuity purchase price. Shorter maturity annuities pay out less than longer-term annuities, in general. Be careful to include fees and expenses when calculating your annuity purchase price and be aware that the annuity purchase price might fluctuate over time.

Is Buying an Annuity a Good Idea?

Although an annuity has obvious advantages, you should also remember that it’s not a very flexible option: you’re often locked in for life. Your money is tied up, so you won’t be able to access it in an emergency.

An annuity may not be as easy to obtain as you think, either. Some providers have limits regarding the amount needed to purchase an annuity. You could also receive less than if you left your money in a pension.

If financial stability for the rest of your life appeals but you’re still not sure if an annuity is for you, you should discuss your options with a financial advisor. Prosperity Wealth is here to help you maximise your pension pot.


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