Once you’ve bought an annuity, you can’t change your mind, so it’s crucial to choose carefully and ensure you get the most income you can for your retirement. 

An annuity is a financial product that you use some or all of your pension savings to buy from an insurer to provide you with an income for life, or for a fixed period of time. You can read more about how they work in our article Annuities explained. But with many hundreds of different annuities on the market, it can be difficult to know where to start, particularly when you’re making such a big financial decision that’ll affect the rest of your life.

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Pension advice can help you get the most out of your retirement income, helping you on your way to a secure financial future. If you have more than £75k in pension savings, take the first step by arranging a free, no-obligation initial consultation with an expert from Aviva Financial Advice. Any recommendations advisers make will be for products from Aviva and other carefully selected partners. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Capital at risk.

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Here’s our step-by-step guide to choosing and buying an annuity, and where you can get further help.

1. Start considering your options

You can access your defined contribution pension from the age of 55 (rising to 57 from 2028), and do as you wish with your retirement savings. For example, you may eventually decide that you want to use some or all of your retirement fund to buy an annuity and/or leave some invested in a drawdown plan. Read more in our article Your pension options at retirement

From around the age of 50, you should start receiving so-called ‘wake-up packs’ from your pension provider, which are essentially documents that encourage you to start considering your pension options. You’ll continue to receive these documents every year or so while you have money in your pension. 

These documents will include details such as the value of your pension, and the different types of annuity that are available from your current pension provider, and how much income they may provide you with. However, it’s important to stress that you don’t have to buy an annuity from your provider, or indeed, buy one at all. If you do buy an annuity, it’s really important to shop around and compare rates (see below) as they can vary widely depending on which provider you go for. Read more in our article Why it pays to shop around for an annuity

Fortunately for those choosing an annuity, rates have soared in recent months, as they are affected by various factors, including interest rates. As interest rates rise, annuity rates increase, pushing up the amount of income you can receive in retirement. The average income provided by an annuity bought by a 65-year-old with a £100,000 pension currently stands at around £7,017 per year.

2. Work out your income needs

Before you buy an annuity, you’ll need to consider how much income you’re likely to need in return for some or all of your retirement savings. If you want a ‘moderate’ retirement, for example, that includes a few holidays in Europe each year, you’ll need an income of £23,300 a year after tax as a single person, according to the Pensions and Lifetime Savings Association’s (PLSA) latest Retirement Living Standards research. This rises to £34,000 for a couple. Read more in our article Can you afford to retire? 

The amount of income you need in retirement may sound unachievable when working out how much you’ll get from an annuity. However, remember that you should also receive the State Pension from age 66 (rising to age 67 by the end of 2028). The full State Pension is about £10,600 a year in the 2023/24 tax year, but to be eligible for this amount, you’ll need to have made 35 years’ worth of National Insurance contributions Read more in our article How the State Pension affects the income you need in retirement.

3. Seek guidance

If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service. However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. 

A financial advisor can talk through your options, and whether or not an annuity may be the right choice for you. They can also discuss the different types of annuity, and which might be suitable for you depending on your personal circumstances.

If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.

4. Compare annuity types

You may be able to get a higher annuity income if you qualify for what’s known as an ‘impaired life/enhanced annuity’ because you have a health condition that is expected to reduce your life expectancy, such as diabetes or heart disease. You might also receive a higher income if you are a smoker, or overweight, for example. The annuity provider pays a higher income as it assumes it will make payments for a shorter period of time.

Meanwhile, ‘fixed term’ annuities can be a useful way of producing an income for a set period of time, such as two or three years, until you receive the State Pension. Since you’ll only receive an income for a relatively short period of time, you’ll use less of your pension than you would if you wanted an income that lasts your lifetime. For example, someone at age 57 might decide to use part of their pot to buy a 10-year fixed term annuity to provide a guaranteed income to take them to State Pension age.

You might also want to choose an annuity that rises in line with inflation if you want peace of mind that your income will keep pace with rising living costs. Your annuity income initially will be typically lower than the amount you’d get from a standard lifetime annuity (which provides a fixed level of income), but over time as inflation rises, the aim is that you should end up with a higher level of income. 

You may also want to consider whether you want a ‘joint annuity’ that’ll pay out to your spouse on your death. As mentioned, a financial advisor can help you to think about all your different options so you can decide which is the most suitable type of annuity for you.

5. Buying your annuity

Once you’ve decided on the right annuity for you, you can go ahead and buy one so you can start receiving an income from your retirement savings. You can usually use the money in your pension (or any other savings) to buy an annuity from age 55, but you don’t have to use the whole amount. Remember that you can withdraw 25% of your pot as a tax-free cash lump sum first if you want, and use some or all of the remainder to buy an annuity. Find out more in our guide Should I take a tax-free lump sum from my pension?

The process of buying an annuity once you’ve chosen the right one for you will typically take several weeks. You transfer your savings to your chosen annuity provider and give them the date you’d like to start receiving your income, which you can usually choose to get monthly, quarterly, half-yearly or annually. Any income received from an annuity is taxed at your marginal rate. Read more in our article How much tax will I pay when I withdraw my pension? 

Ultimately, there are many factors to consider when you’re buying an annuity, so it’s important to take your time and ensure you make the right decision for you. 

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