Think All Annuities Are the Same? Think Again
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
There is a risk to your capital and you may not get back the full amount invested. The value of investments, as well as the income from them, can fall as well as rise.
When it comes to planning for retirement, there are few decisions more important than how to turn your pension savings into income. One option that is becoming popular once again is a lifetime annuity, which a product that provides you with a guaranteed income for the rest of your life. On the surface, the concept is simple, but not all annuities are created equal. In fact, failing to shop around could cost you thousands of pounds in lost income over your retirement.
Below, we’ll explore what a lifetime annuity is, why it pays to compare providers, and how a financial adviser can help you make an informed, confident decision.
What is a Lifetime Annuity?
A lifetime annuity is a financial product you can purchase using some or all your defined contribution pension pot. In exchange, an insurance company will pay you a regular, guaranteed income for the rest of your life, no matter how long you live. You can usually choose to receive income monthly, quarterly or annually, and many plans give you the option to include features like inflation-proofing or a spouse’s pension.
The appeal lies in the certainty and security an annuity offers: unlike flexi-access drawdown or other investment-based options, an annuity provides peace of mind that you won’t run out of income.
Why It Pays to Shop Around
The key message here is simple: you do not need to buy your annuity from your existing pension provider. In fact, you could receive a significantly higher income by looking at the open market.
Each provider uses its own assumptions and pricing models, meaning that the annuity income offered can vary considerably. Factors such as your age, health, postcode and lifestyle (such as smoking or drinking habits) can all influence the rate you are offered.
Here are some compelling reasons to compare annuity providers:
1. Variation in Rates
The difference in income between the highest and lowest paying providers can be substantial. Even a small percentage increase in annual income becomes meaningful over a 20 or 30 year retirement.
2. Enhanced Annuities
Some providers offer enhanced or impaired life annuities, which provide higher income for those with certain medical conditions or lifestyle factors. Common examples include high blood pressure, diabetes, or even a history of smoking. Not all insurers offer enhanced terms and may apply different scales for different conditions so if you don’t shop around, you may miss out on a significantly better rate.
3. Flexible Features
Different annuity providers offer different options and add-ons which may or may not be available across all providers:
• Spouse’s or Dependant’s Annuity: This ensures a percentage of your income continues to your spouse or partner after you pass away.
• Inflation Linking: You can choose for your income to increase each year in line with inflation, helping to preserve your spending power over time. This may be fixed percentage or linked to an inflation index like CPI/RPI
• Guaranteed Periods: If you die within a certain number of years from starting your annuity, the income continues to be paid to your beneficiaries.
• Value Protection: Some annuities will return a lump sum to your estate if you die early and haven’t received as much income as you paid in.
These features are not universally available or priced equally across providers, and choosing the wrong one for your needs could result in missed value or benefits.
4. Financial Strength and Reputation
The financial stability of the provider matters too. While annuities are protected by the Financial Services Compensation Scheme (FSCS), selecting a well-regarded and financially strong provider helps reduce risk.
A Real-Life Example
John is 67 years old and recently retired. He has a defined contribution pension pot worth £200,000.00. He has no spouse or children and his goal is to secure a guaranteed income to supplement his full State Pension. John is a non-smoker and in good health.
Based on current market research, a single life annuity with a five-year guarantee period, paid monthly in advance with no annual increases, could provide John with an income ranging from £14,607.24 to £16,266.48 per year, depending on the provider.
By simply shopping around, John could increase his retirement income by £33,184.80 over a 20-year period, without taking on additional risk or complexity.
Quote source - iPipeline – 10/04/2025
The Value of Professional Financial Advice
While comparison websites can give you an indication of the rates available, navigating annuity options on your own can be overwhelming. Choosing the right annuity involves balancing many factors, your health, your family needs, inflation expectations, tax considerations and the long-term sustainability of your income.
A suitability qualified, Independent Financial Adviser can:
• Access the whole annuity market on your behalf
• Ensure you are considered for enhanced annuities
• Explain the trade-offs between fixed and escalating income
• Model your retirement income needs in detail
• Help with the paperwork and ensure correct implementation
Crucially, they can ensure the annuity you purchase is the right one for you, not just the easiest or most obvious choice.
Final Thoughts
Buying an annuity is typically a once-in-a-lifetime decision, and it’s not something you want to get wrong. The product you choose today will affect the income you receive for the rest of your life. While annuities can be a very effective solution for many retirees, taking the time to shop around and seek professional advice can make a substantial difference to your financial security.
If you’re considering an annuity or have been offered one by your pension provider, speak to a qualified financial adviser. We can help you compare your options and ensure that every pound of your pension pot works hard for you in retirement.