The purchase process

When you reach retirement age and have accumulated pension savings, you have several options for accessing that money:

• One option is to use some or all of it to purchase an annuity. You approach an insurance company (either directly or through a financial adviser), provide details about your circumstances, and receive a quote for how much annual income your pension pot can purchase.

• The amount of income you receive depends on numerous factors including the size of your pension pot, your age, your health, whether you smoke, your postcode, current interest rates and bond yields, and the specific features you choose for your annuity.

Income payments

• Once you’ve purchased the annuity, the insurance company begins making regular payments to you according to the agreed schedule.

• These payments continue for the duration specified in your contract—which could be for a fixed term or, more commonly, for the rest of your life.

• The insurance company invests your lump sum, typically in low-risk assets like government bonds and high-grade corporate debt.

• The returns from these investments, combined with the actuarial calculations about how long you’re likely to live, determine how much they can afford to pay you.

Various types of pension annuities

Let’s take a closer look at the various types of pension annuities there are:

• Lifetime annuities are the most traditional form. They provide income for the rest of your life, regardless of how long you live. This offers complete protection against longevity risk—the risk of outliving your savings. If you live to be 100, you’ll still receive your annuity payments. However, if you die shortly after purchasing the annuity, you might receive far less back than you paid in, unless you’ve purchased additional protections.

• Fixed-term annuities provide income for a specified number of years rather than for life. These are less common but can be useful in specific circumstances, such as bridging the gap until you receive state pension or other income sources. At the end of the term, you receive back the remaining fund value, which you can then use to purchase another annuity or access in other ways.

• Single life annuities pay income to one person only. When that person dies, the payments stop (unless you’ve added a guarantee period or value protection, which we’ll discuss later). These typically offer the highest income rates because the insurance company only needs to provide for one life.

• Joint life annuities (also called joint and survivor annuities) continue paying income to a surviving spouse or partner after the first person dies. You can choose what percentage of the original income continues—commonly 50%, 67%, or 100%. Because the insurance company may need to make payments for longer, the initial income from a joint life annuity is lower than from a single life annuity with the same starting capital.

• Level annuities pay the same amount throughout the entire term. They’re simpler to understand and provide the highest initial income. However, inflation erodes the purchasing power of that income over time. An income that seems comfortable at age 65 might feel inadequate at age 85 after twenty years of inflation.

• Escalating annuities increase the income payments over time. You can choose either a fixed percentage increase each year (such as 3% or 5%) or increases linked to inflation measures like the Retail Price Index (RPI) or Consumer Price Index (CPI). The trade-off is that your starting income is significantly lower than a level annuity—sometimes 30-40% lower for inflation-linked options. However, over a long retirement, an escalating annuity may ultimately provide more income and better maintain your standard of living.

Enhanced and impaired life annuities

Not all annuities pay the same rate, even for the same purchase price and age. Enhanced annuities (also called impaired life or lifestyle annuities) offer higher income to people with health conditions or lifestyle factors that may reduce their life expectancy.

Conditions that might qualify you for an enhanced annuity include heart conditions, high blood pressure, diabetes, cancer, kidney disease, chronic lung conditions, high cholesterol, obesity, and being a smoker. Even your postcode can affect rates, as it serves as a proxy for socioeconomic factors that correlate with life expectancy.

The logic is straightforward: if you’re statistically likely to live fewer years, the insurance company expects to make fewer payments and can therefore offer a higher annual income. Enhanced annuities can sometimes provide 20-30% more income than standard rates, making them significantly more attractive for those who qualify.

Investment-linked annuities

While most annuities provide fixed income, some products link payments to investment performance.

• With-profits annuities invest your money in a with-profits fund, and your income can increase (or theoretically decrease) based on the fund’s performance. You receive a base level of income plus potential bonuses. These offer the possibility of income growth but come with more uncertainty than conventional annuities.

• Unit-linked annuities are even more directly tied to investment performance, with your income dependent on the performance of underlying investment funds. These are relatively rare in the pension annuity market and blur the line between annuities and other retirement income options.

Key features and options

When purchasing an annuity, you can select various features that affect how much income you receive and what happens in different circumstances.

• Guarantee periods: A guarantee period (typically 5 or 10 years) ensures that even if you die shortly after purchasing the annuity, payments will continue to your beneficiaries for the remainder of the guarantee period. For example, with a 10-year guarantee, if you die after three years, your beneficiaries will receive payments for another seven years.

• Value protection: Value protection (also called capital protection) ensures that if you die before the annuity has paid out an amount equal to your original purchase price, the difference is paid to your beneficiaries as a lump sum. This guarantees that your beneficiaries will receive at least the full value of your pension pot, either as income payments or as a lump sum balance.

• Overlap and deferred payment options: Some annuities allow for creative timing of payments. For instance, you might purchase an annuity now but defer the income start date until later, potentially receiving a higher income rate when payments begin. This can be useful for retirement planning strategies where you have other income sources in the early years of retirement.

Advantages of pension annuities

Pension annuities offer several compelling benefits that make them attractive for certain retirees.

• Guaranteed income for life: The primary advantage is certainty. Once you’ve purchased a lifetime annuity, you know exactly how much income you’ll receive for the rest of your life. This eliminates longevity risk—the possibility of outliving your savings. No matter how long you live, whether to 85, 95, or 105, you’ll continue receiving payments.

• Simplicity: Annuities are straightforward. Once purchased, they require no management, no investment decisions, and no ongoing monitoring. The income simply arrives regularly, allowing you to focus on enjoying retirement rather than managing finances.

• Protection from investment risk: Annuity holders are insulated from market volatility. Whether stock markets soar or crash, your income remains the same. This is particularly valuable in retirement when you have less time to recover from market downturns and may be more risk-averse.

• Efficient use of capital: Because annuities pool longevity risk across many people, they can provide higher income than you could safely generate from the same capital on your own. Those who die earlier than average effectively subsidize the income of those who live longer. This mortality cross-subsidy means annuities can offer income rates that would be unsustainable if you were drawing down your own investments while trying to ensure you don’t run out of money.

• Potential tax advantages: In some jurisdictions, portions of annuity income may receive favorable tax treatment, particularly if the annuity was purchased with already-taxed money. The tax situation varies significantly by individual circumstances, but this can be an additional benefit.

Disadvantages and limitations

Despite their benefits, annuities also have significant drawbacks that have made them less popular in recent years.

• Irreversibility: Once you’ve purchased an annuity, you generally cannot change your mind, access the capital, or switch to a different product. Your pension pot has been permanently converted into an income stream. If your circumstances change, if better annuity rates become available, or if you need access to capital, you’re locked in.

• Poor value for early death: If you die shortly after purchasing an annuity without adequate protection features, you may receive back far less than you paid in. Your pension savings, accumulated over decades, could effectively disappear with little benefit to you or your heirs. While protection features like guarantee periods and value protection address this concern, they reduce your income rate, diminishing the annuity’s attractiveness.

• No capital access for emergencies: With your pension pot converted into an annuity, you no longer have access to capital for emergencies, opportunities, or changing needs. If you face unexpected medical expenses, want to help family members, or encounter any situation requiring a lump sum, you cannot access the money underlying your annuity.

• Low returns in low-interest rate environments: Annuity rates are heavily influenced by government bond yields and prevailing interest rates. In periods of historically low interest rates, annuity rates are similarly depressed, offering relatively low income relative to pension pot size. This has been a particular concern since the 2008 financial crisis and through the low-rate environment of the 2010s and early 2020s.

• Inflation risk (for level annuities): If you choose a level annuity—as many do because of the higher initial income—inflation will gradually erode your purchasing power. Over a 20 or 30-year retirement, even modest inflation can significantly reduce the real value of your income. While escalating annuities address this, their much lower starting income makes them less attractive to many purchasers, creating a difficult trade-off.

• Lack of inheritance for beneficiaries: Unless you purchase specific protection features or a joint-life annuity, your pension wealth doesn’t pass to your beneficiaries when you die. Many people find it psychologically difficult to accept that the money they’ve saved throughout their working life will not benefit their children or other heirs.

• Inflexibility to changing circumstances: Retirement needs change over time. Perhaps you want to spend more in early retirement while you’re healthy and active, and can accept less later. Or maybe your health deteriorates and you need more income for care costs. Annuities provide a fixed income pattern that cannot easily adapt to changing circumstances.

The open market option and shopping around

One of the most important—yet frequently overlooked—aspects of purchasing an annuity is that you’re not obligated to buy from your pension provider. The “open market option” allows you to shop around among different insurance companies to find the best rate.

Different providers offer different rates based on their investment strategies, risk appetite, and the demographics of their existing annuitant population. The difference between the best and worst rates for the same circumstances can be substantial—sometimes 20% or more in annual income.

Using a specialized annuity broker or comparison service can help identify the best rates for your specific circumstances. This is particularly important for enhanced annuities, where different providers specialize in different conditions and may offer vastly different rates based on your health profile.

Many people simply accept the rate offered by their existing pension provider out of inertia or lack of awareness, potentially losing thousands of pounds of income over their retirement. Shopping around is perhaps the single most important action you can take to maximize your annuity income

Making the decision: Is an annuity right for you?

Deciding whether to purchase an annuity is deeply personal and depends on numerous factors unique to your situation.

Consider an annuity if you:

• Value certainty and guaranteed income above all else
• Have no other guaranteed income sources sufficient to cover essential expenses
• Are concerned about outliving your savings
• Don’t want the stress of managing investments in retirement
• Have significant longevity in your family history
• Are in better-than-average health
• Have sufficient other assets to leave to beneficiaries

Think carefully before buying an annuity if you:

• Are in poor health or have conditions significantly reducing life expectancy
• Want to leave your pension wealth to beneficiaries
• Need flexibility to access capital
• Have other substantial guaranteed income (like defined benefit pensions)
• Are comfortable managing investments
• Want your retirement income to have growth potential
• Are purchasing when annuity rates are historically low

Getting professional advice

Given the complexity and irreversibility of annuity purchases, professional financial advice is strongly recommended. A qualified adviser can help you:

• Understand all your options comprehensively
• Compare annuity purchase against alternatives
• Shop the market for the best rates
• Structure your retirement income optimally
• Consider tax implications
• Ensure you’re getting maximum value from enhanced rates if eligible

The cost of advice is typically far outweighed by the value of avoiding mistakes and optimizing your retirement income strategy.

The takeaway

The decision to purchase an annuity shouldn’t be made in isolation. It should be part of a comprehensive retirement income strategy that considers all your assets, income sources, essential and discretionary spending needs, family circumstances, health, and personal preferences regarding security versus flexibility.

As you approach retirement, invest time in understanding your options, shop around if you decide to purchase, consider professional advice, and make decisions that align with your personal circumstances and values. Your retirement income strategy is too important to be left to chance or made in haste. Take the time to understand pension annuities thoroughly, and you’ll be better positioned to make a decision you can live with comfortably throughout your retirement years.

Let Peachtree help

At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their future annuity payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every annuity is unique, which means every payment sale will be different, they all have the same basic five steps:

• Call one of our representatives.
• Receive a free, no-obligation quote for the sale of your payments.
• Review and sign the purchase agreement.
• We process the agreement with your insurance company.
• You get your cash!

Why should you choose Peachtree?

It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.

Call 1-855-680-4121 and speak with a representative today!

This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.