Annuities

Right for you

Around 80% of people retiring choose an annuity to provide their income in retirement. Read on to find out if an annuity is the right thing for you.

Advantages	Disadvantages
It pays you a guaranteed income.	You can't change an annuity once it's set up.
The income is paid for your lifetime, not a set number of years.	You can't get your money back at a later date, unless you've chosen value protection.
Income will never run out in your lifetime.	If the annuity is set up on your life only then it'll stop on your death.
There's no investment risk on conventional annuities.
It can provide an income for members of your family too, if you die before them.
It can protect your income against the effects of inflation.
Value protection can protect some of your original investment if you die before 75.

According to the Association of British Insurers (ABI), the average 65-year-old man will live until around 84 and the average 65-year-old woman to 87. And, of course, some people will live longer than that – you could be retired almost as long as you were at work. So it's important to make sure you won't run out of money in retirement.

If you lived to a ripe old age you would actually receive more in income than you had originally paid in. In effect, you're paying for the insurance company to take on the risk of you living longer than the average person.

Example

If, for example, we set up an annuity for you and agree to pay you £5,000 each year then we guarantee to pay you this amount whether you live to 75, 85, or even if you live to 105! The table below shows what a difference that would make to your total income in retirement, if you had retired at 60.

Age at death	Years in retirement	Total income
75	15 years at £5,000 each year =	£75,000
85	25 years at £5,000 each year =	£125,000
105	45 years at £5,000 each year =	£225,000

Based on our rates as at 7 July 2006, a 60-year-old man would need a pension fund of £67,100 to buy an annuity of £5,000 to be paid at the end of each year. If you compare that with the total income table above, then even at age 75 he's received more income than he originally invested.

As you can see, an annuity can make a big difference to how you spend your retirement.

It's important that you also read the risk factors on the legal page.

Not right for everyone

Of course, although annuities can be a great way to provide your retirement income, they aren't the only way.

When you get close to retirement you may prefer to switch your pension fund to an income drawdown policy - known as an unsecured pension (USP) before age 75. Or at 75 you may be able to opt for an alternatively secured pension (ASP), which is a type of income drawdown policy. In an income drawdown policy you take income straight from your pension fund.

The main difference between these types of policy and annuities is that USP and ASP both allow you to make withdrawals when you need them rather than commit to a fixed rate of income. You can also choose which funds you want to invest in rather than us deciding that on your behalf. Of course that also means that with USP and ASP there's an increased risk that your income will go down if the performance of your funds is poor and you could run out of money before you die. Find out more about our unsecured and alternatively secured pensions.

You can also get further details of the different options on offer, from the Financial Services Authority's (FSA's) leaflet called FSA guide to pensions 3: Annuities and other retirement options, availabe to order or to download from its website.

Not everyone's circumstances are the same and we don't all have the same amount of money, so it's important you take time to choose the income option that's right for you. A financial adviser can help you decide. They can look at all your finances with you - such as savings and ISAs as well as your pensions - and help you decide the best retirement income option for you.