What’s a lifetime annuity?

Setting up a lifetime annuity gives you an income for the rest of your life. It’s one way to boost your finances in retirement. But how does the product work? And what are the benefits and risks it offers?

In this article we’ll take an in-depth look at lifetime annuities. By exploring all the key details and features, you can see if the product might suit your needs.

What’s on this page?

How does a lifetime annuity work?
What are the benefits of a lifetime annuity?
What happens to a lifetime annuity when you die?
Are there any risks with an annuity?
How much income can you get?

How does a lifetime annuity work?

Lifetime annuities are used to convert your retirement savings into a regular income. Here’s how they work:

You buy your lifetime annuity from an insurance company.
You could fund the purchase using your private pension pot. You can access this money when you turn 55.
The insurance company then pays you a set amount monthly, quarterly, twice a year or once a year. This will last for the rest of your life.
If you take out a joint lifetime annuity, the payments will continue until both you and your partner have died.

Some annuity providers also offer fixed-term products. But the info on this page only relates to lifetime annuities.

What are the benefits of a lifetime annuity?

Enjoy a guaranteed income for life

Instead of needing to invest your money, you can relax knowing you have a regular income. This guaranteed supply of funds can provide peace of mind throughout your retirement.

How ever long you live for, there’ll always be a set amount of money coming in. This means you can spend less time worrying about finances and focus more on the things you love in life. Perhaps that’s spending time with grandchildren, taking up a new hobby, or going on holiday.

Support loved ones after you die

The main appeal of lifetime annuities is guaranteeing your personal income. But you may also want to protect loved ones after you’ve passed away. Thanks to the optional features that we’ve outlined below, you can ensure this happens.

Depending on the add-ons you choose, your annuity payments can transfer to your partner or family members in the future. This means lifetime annuities can be a helpful tool for both you and the people you love.

What happens to a lifetime annuity when you die?

After you pass away, the payments will normally stop. But if you want to protect your loved ones, there are several product add-ons you can choose.

1. Value Protection

This optional feature allows a loved one to receive some or all of the remaining funds when you die. How much they get depends on the amount that’s left, your final age, and the percentage of annuity you protected. Some providers allow you to protect 100% of the original amount. Others only allow partial protection.

If you’re under 75 when you pass away, your loved one gets the money tax free.
If you’re over 75 when you pass away, the money is taxed at your loved one’s marginal income rate. This means the value is added to any other income they receive, and the tax is calculated on the total value.

There is also a lump sum and death benefit allowance to consider. This could limit how much your beneficiary can receive. You can find out more on the HMRC website.

2. Guarantee Period

This is another way you could pass on your payments to a loved one when you die. Here’s how it works:

When you buy the annuity, you choose a guaranteed time period. This could be five, 10 or even more years.
For the duration of this period, your funds will be paid to you.
If you pass away during this period, the funds will be paid to your beneficiary or to your estate. These payments will continue for the rest of the guaranteed timeframe.

3. Joint Income

If you’re married or have a partner, you could opt for this feature. It means your other half could continue to receive the annuity payments when you pass away. The same tax rules apply as outlined in the section above about Value Protection.

Are there any risks with an annuity?

As well as the advantages that we’ve just looked at, there are some risks linked to lifetime annuities.

You can’t reverse your purchase – Once you’ve bought a lifetime annuity, you can’t change your mind. This means you’re not allowed to transfer it or cash it in. Therefore it’s important you’re sure about making the decision in the first place.

Inflation can affect the cost of life – If your lifetime annuity income is fixed, you will receive the same amount for the rest of your life. As a result of inflation, this amount might not go as far in the future, and you might need to find other ways to supplement your income. However, you could choose to ‘inflation proof’ your income when you take out the annuity.

Loss of money if you die early – If you don’t protect your annuity, the remaining pot will be lost when you die. This could feel like poor value if you paid a big sum but only got some of it back.

How much income can you get?

The income you receive from a lifetime annuity will depend on two things:

The value of your annuity.
The interest rate you secure.

For example, if your annuity is £100,000 with a rate of 5%, you could get an annual income of £5,000. This amount is subject to tax.

The value of your annuity

The bigger your pension pot, the bigger annuity you can purchase. That’s why some people give their pension more time to grow before setting up an annuity. Although if you want to get on with it, you can access your pension pot from the age of 55 onwards.

The interest rate you secure

With rates playing an important part in your potential income, it’s important to shop around for the best deal. As well as the provider you go with, there are several factors that can affect rates:

Your age – Rates tend to be higher the older you are. This is because the provider might not have to pay out as long.

Your health – If you have a serious health problem, the rate could be higher. This is due to your life expectancy and how long payments may be required.