How misunderstanding annuities can cost you thousands

An annuity is an income for life, provided in exchange of your pension fund. Knowing what annuities mean for you can help you make the most appropriate decision for securing a retirement income. Traditionally they were the main retirement product, but pension changes announced in last year's Budget mean that no one will need to purchase an annuity if they don't want to. Instead, they can choose income drawdown or remove money as and when they want to.

As they guarantee an income for life, annuities offer security. For some people, this is more important than the actual level of that income, as they know they can depend on it each month. If this security is of prime importance to you, an annuity may be your preferred choice.

However, the level of income paid to you depends on the annuity rates at the time your policy begins, and these rates are currently low. The following table shows you the income a 65-year-old male could have received with a £100,000 pension fund over the last two decades:

Year Income
2015 £4,961
2014 £5,645
2013 £5,815
2012 £5,962
2011 £6,806
2010 £6,574
2009 £7,171
2008 £7,810
2007 £7,390
2006 £7,150
2005 £7,160
2004 £7,470
2003 £7,380
2002 £7,320
2001 £7,810
2000 £8,140
1999 £8,450
1998 £9,890
1997 £9,970
1996 £10,550

It's also important to remember that not all annuities are equal. The main types are:

  • Standard
  • Enhanced
  • Fixed term
  • Joint life


Standard annuities offer a guaranteed income for life, and can be level or be index linked. A level income will always pay the same amount of money each year, which means the value of the payments is likely to decrease over time thanks to inflation. An index-linked annuity will have payments that adjust in line with the Retail Prices Index (RPI) or a fixed amount, such as 3% annually.


Enhanced annuities offer a higher income than standard annuities for a fund of equal value because the people that receive them have a lower life expectancy. Certain conditions qualify for an enhanced annuity, such as:

  • Cancer
  • Heart disease
  • Smoking
  • High blood pressure
  • Diabetes

Joint life

With a joint life annuity, a beneficiary will receive an income after the policy holder passes away. The level of this income is chosen at the start of the policy, from either 50%, 66% or 100%. These annuities offer peace of mind that the beneficiary will receive an income, but the payments made to the policy holder will be lower than with a standard annuity because the provider will be expecting to pay out for a long time.

Fixed term

A fixed term annuity allows an income to be taken for a specific period of time, such as one year, and then receive a pension fund back once the term is finished. The income limits are the same as capped drawdown, currently 150% GAD rates, which means that the income can be higher than that offered by a standard annuity.

Despite the new pension rules, annuities remain a suitable retirement product for many people, and knowing the range available can help you understand what annuities mean for you.

Have the pension freedoms changed your view of annuities? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension, and

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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