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An annuity is a financial product that allows you to convert your pension savings into a regular income that will last you for the rest of your life.
When you get a quote for an annuity, you will be given a rate as a percentage which you need to multiply by your pension savings to calculate how much income you will get every year.
So, if you have £100,000 in your pension pot, and are offered an annuity rate of 5%, you will get an annual income of £5,000 a year.
There are several different types of annuity to consider;
• Single life annuities - all the income is paid to you
• Joint life annuities - some or all of your income is paid to your partner after you die
• Escalating annuities - your income rises every year, often by the rate of inflation
• Enhanced annuities - these pay you more income if you have a medical condition
• Investment annuities - your money remains invested with the potential for higher income
• Flexible annuities - these are complex products that pay you a guaranteed income but leave the potential for your money to grow by keeping part invested
• Fixed-term annuities - these pay out for a fixed period, after which you get paid a lump sum
It is always best to discuss your options with an independent financial adviser before you make a decision about your retirement pension or annuity.
