A Complete Guide to Pension Jargon

Are you new to Pensions and Annuities?

If your answer is yes, then the chances are high that you may get bombarded with arcane technical terms or financial jargon by your fund manager, which will sound like gobbledygook at best.

Here’s our guide that will help you unravel the mystery behind most commonly used terms by Pension managers.

  1. Pension: A universal term that is used commonly to describe a tax-free long-term retirement savings plan as well as the income that you may receive from it.
  2. Annuity: A contract between you and an insurance company, where you exchange a large part of your pension pot in exchange for a fixed monthly income, which will be paid until your death. Some types of annuities can provide your dependent spouse or children with an income after your death.
  3. Defined Contribution Pension Scheme/Money Purchase Scheme: A type of pension scheme into which you and your employer will make periodic contributions. The retirement income will be based on the amount of money accumulated, the investment returns on the fund and the annuity rates prevalent at that time. The scheme must be run either by an insurance company or maybe a customized scheme set up by your employer.
  4. Defined Benefit Scheme/Final Salary Pensions: A type of pension plan where the retirement income is based purely on the basis of contributions made and the length of time that you were a member of the scheme. The final salary is the determining factor in most cases.
  5. Cash Balance Pension: A type of pension plan in which your employer promises to pay you a specified pension pot amount, calculated on the basis of a proportion of your yearly salary. You will know beforehand the pension pot amount but there is no guarantee about the amount of pension you will be able to take or buy from this pot.
  6. Cash Lump Sum/Tax-Free Lump Sum: An amount of your pension pot (Usually 25%) that you can take as tax-free cash at the time of retirement.
  7. Drawdown/Income Drawdown: A plan under which you can derive an income from your pension scheme while keeping the original pot invested.
  8. Flexi Access Drawdown: As per new rules, it has replaced the existing Capped Drawdown and Flexible Drawdown from April 2015. In this plan, you can withdraw any amount of money from your pension scheme without interfering with the original pot.
  9. Guaranteed Annuity Rates (GAR): A guaranteed minimum rate offered by some pension providers, at which the pension pot will be exchanged for an income. The benefit of a GAR is that you can be assured that your income will not go below a certain guaranteed level.
  10. Guaranteed Drawdown: A type of scheme that gives you the benefit of a guaranteed income combined with the flexibility of a drawdown.
  11. Market Value Reduction: A practice used by pension providers in which an exit penalty is applied if you surrender the policy before maturity or even after it.
  12. State Pension: A fixed monthly income paid by the Government once you reach SPA (State Pension Age). Both, the qualifying age for State Pension and the amount to be paid per week are set to change in the years to come.
  13. Stakeholder Pension: A type of personal pension plan that is known for its low annual charges. Most stakeholder pension plans have limited fund options for investment.
  14. SIPP: A type of personal pension plan which gives you more flexibility and control over your investments. You will decide how your pension funds are invested rather than a fund manager and hence, the risk associated with an SIPP is considerably higher. They may also have higher charges.
  15. Transfer Value: The actual amount that you will receive after deducting penalties and charges if you decide to transfer your funds elsewhere.
  16. Additional Voluntary Contributions: Voluntary top-ups to a company pension scheme which you can make. This is in addition to the minimum required contributions.
  17. Free Standing Additional Voluntary Contributions: Voluntary top-ups made to a personal pension plan.

While these may not be the only terms you hear, we have tried to cover the frequently used ones.

For more information about pensions, visit our Complete Pensions FAQ page.


Guide to Annuity Jargon

If you find yourself at your wit’s end trying to figure out the meaning of certain ‘terms’ in your pension manager’s sales pitch, you are not alone.

A lot of retirees face the problem of having to deal with an abundance of technical jargon when they first speak to insurance experts.

Unless you work in an insurance company or are a qualified financial adviser or have read about these things, it is normal to be confused.

Here’s our guide that should help debunk these arcane terms about annuities.

  1. Annuitant: The annuitant is the person who purchases the annuity
  2. Escalating Annuity: A type of annuity in which your income increases by a set percentage every year which can be specified by you. The higher the percentage you select, the lower your monthly payout will be initially.
  3. Index-Linked Annuity: A type of annuity in which your income will rise in line with rising prices (inflation). Either the Retail Prices Index (RPI) or the Consumer Prices Index (CPI) is used as a reference.
  4. Compulsory Purchase Annuity: It was compulsory for every citizen to purchase an annuity before the age of 75. This rule was changed in April 2006. Hence, the term Compulsory Purchase Annuity is an obsolete one.
  5. Capital Protected Annuity: A type of annuity in which your entire pension pot will be returned to a nominated beneficiary in the event of your death before a set time period. The returned amount will be subject to 35% tax.
  6. Enhanced annuity: A type of annuity with higher rates offered to retirees who may have a shorter life expectancy due to certain medical conditions or lifestyle-related conditions. For example, people with cholesterol, cancer, those who smoke or those who have recently quit smoking may be eligible for it.
  7. Guaranteed Time Period: A specified time period (5 or 10 years) for which, your annuity payment will be paid even in the event of your death. You can choose whether you want the remaining payment to be paid as a lump sum or as a regular income.
  8. Investment Linked Annuity: A type of annuity in which one part of your pension pot will be used to provide you with a low minimum guaranteed payment. The remainder will be invested in funds and the further income provided will be variable.
  9. Joint Life Annuity: A type of annuity in which your dependent spouse, civil partner or children will continue to receive the annuity payment for the rest of their life or a set time period, in the event of your death.
  10. Single Life Annuity: An annuity in which you will be the only annuitant who will receive the annuity payments for life. The payments will stop upon your death. If you have selected a guarantee period, then the payment will continue till that period.
  11. Level/Fixed Annuity: An annuity where the income will remain fixed for your lifetime.
  12.  In advance: The type of payment frequency you select in advance. For example, if you select a payment frequency of quarterly in advance, you will receive your payments at the completion of three months.
  13. OMO (Open Market Option): An annuitant’s right to shop around to find the best annuity rate by seeking quotes from multiple annuity providers
  14. Payment Frequency: The frequency at which you receive your payments. Can be monthly, quarterly, half-yearly or yearly.
  15. Postcode Annuity: A specialized type of annuity which is offered on the basis of the area where you live. A postcode annuity is based on the thought that people living in poorer areas may have a shorter life expectancy and people living in a richer locality may have a longer life expectancy.
  16. Purchased Life Annuity: A type of annuity that is not purchased using the money in your pension pot. You can use your pension commencement lump sum or any other funds that you may have saved.

RELATED: Types of Annuities

Factors That Determine Your Annuity Income

As annuity rates dip after the infamous credit crunch, pensioners were left with a bare minimum monthly income despite selling their entire hard-earned pension pot.

Then came the pension overhaul which has changed the way retirees can access their pension pot and use it.

Buying an annuity before the age of 75 is now merely an option that pensioners can choose to ignore. They can instead take the entire amount as a cash lump sum or draw small instalments of money when they wish to.

But as experts recommend, buying an annuity may still be a better choice, because it guarantees retirees with a fixed monthly income for the rest of their lifetime.

With rising life expectancy, a person’s retired life could last well beyond two decades, even three. Will the money last that long if you take it all in one go?

Would you rather blow your entire pension on a Lamborghini or have a fixed monthly income that remains unaffected by the economy or the stock market crash?

How much will you get?

The first question that most savers ask is, ‘How much money will I get every month if I buy an annuity’. The answer is relative.

There are multiple factors, individually dependent, that can influence your annuity income. Here are some of them.

  1. The Type of Annuity: Buying an annuity is a one-time decision that usually cannot be reversed. So, ensure that you know what you are choosing. The type of annuity you choose along with the options you select will impact your monthly retirement income. For example, if you have a dependent spouse or child, you may have to opt for a joint-life annuity which will reduce your monthly income but ensure that the income will be paid to your dependent nominee for the rest of their lifetime.
  2. Annuity Rates: The annuity rate when you buy the annuity is one of the most crucial factors that will influence your income. If the rates are high, you get a higher monthly income. If the rates are low, the income will be lower.
  3. Deposit Amount: More the money you put into an annuity, the higher you get each month. If you have accessed your pension pot and drawn the tax-free cash lump sum amount (25%), then you may be left with a smaller amount to exchange for your annuity.
  4. Payment Terms: How do you wish to be paid? An annuity provider can pay you monthly, quarterly or even yearly. The more you defer the payment, larger the amount you receive.
  5. Age: The younger you are when you buy an annuity, the lesser you will receive. For example, if you buy an annuity at 65, the insurance company will consider your current health and the life expectancy at that time to determine your monthly income. At the same time, if you choose to buy an annuity at 75, your life expectancy reduces. So, the annuity provider has to pay you a fixed monthly income for less number of years. Hence, you may qualify for a higher monthly income than what you would have received if you bought the annuity at the age of 65.
  6. Your Pension pots: The number of pension pots you have accumulated over the years will increase the amount of money you use to purchase an annuity. So, consolidating your pension pots can give you a higher monthly income.
  7. Inflation: Inflation can affect what you can purchase with your fixed monthly income in 10 years from now. So, unless your annuity income increases with time, it could not be enough for you to lead the lifestyle you do currently. A positive sign is that inflation rate in UK reached an all time record low of -0.10 percent in April 2015. But whether the trend will continue or increase; only time can tell.
  8. Tax: Annuity payments are subject to taxation at your usual rate. So, if you have other sources of income, then you must speak to an independent financial expert about your financial circumstances before you invest in annuities.

Immediate Need Care Annuity

In 2011, almost 300,000 elderly people in the UK were living in a care home facility. If the numbers of people opting for residential care or those in a nursing home were also accounted for, then it would be a significant chunk of the population.

Yet, only a very small percentage of these people receive assistance from the state.

The cost of long-term care can be staggering. It is estimated that residential care can cost up to £30,888 depending on where you are based in the UK.

Nursing care, on the other hand, can cost up to £41,912 depending on the location.

The cost of long-term care may reduce or increase based on your current health condition.

In such circumstances, an immediate needs annuity might be a good choice.

Also known as a care fee annuity or immediate care plan, it is an annuity arrangement that will pay you a fixed guaranteed income for life to pay for healthcare expenses.

How it works

If there is a significant gap between your earnings and the cost of care, then that amount will be provided by an immediate needs annuity, in exchange for a lump sum cash amount.

It can also be purchased by a caregiver to an elderly relative.

The amount that you would need to pay to receive the guaranteed income would depend on multiple factors. Some of them are:

  • The income you need every month
  • Your age
  • Your health condition (lesser your life expectancy, cheaper the plan will be)
  • Annuity Rates

Once the annuity plan is purchased, the tax-free guaranteed income will be paid directly to the care provider. You can either choose a fixed income or opt for an index-linked income which will rise with rising expenses.

An escalation can also be attached to the annuity in which the income will rise by a set percentage (between 1 to 8%) each year.

Also, you can opt for capital protection, which would assure that, in the event of your untimely death, some amount of the pension pot (up to 75%) would be returned back to your family. However, if you opt for capital protection, it would increase the cost of purchasing the annuity.

Deferred annuity

A deferred annuity is a type of annuity plan in which you can purchase an annuity plan but defer the payments for a specified number of years, which is called the ‘Deferred period’. (1 to 5 years)

If your health is deteriorating or you expect healthcare costs in the years to come, then you may opt for a deferred annuity. However, you will have to pay the cost for the care during the deferred period.

The main advantage of a deferred annuity over an immediate needs plan is that the capital amount needed to purchase the annuity. The more the period is deferred,  the less the annuity will cost.


Annuity providers have various means to determine if an application for immediate care annuity is eligible. The Anderton diagnosis index is considered as a reference guide.

The rate that you may receive will differ according to the medical condition suffered by you or your relative.

Is this the right choice for me? 

An immediate need annuity will be the right choice for you if one or more of the following apply to you.

  1. You or a relative is in a care home or is receiving residential care for a health condition
  2. There is a significant difference in your income and the care costs
  3. You wish to have a guaranteed monthly income that can be utilized for your care costs
  4. You wish to safeguard your remaining capital and cap the cost of your healthcare
  5. You have the capital amount needed to purchase the annuity

It may not be the right choice for you in the following scenarios:

  1. You do not have immediate healthcare costs.
  2. The health condition may only need temporary care
  3. You need the capital amount back in the future
  4. You may be eligible for Continuous Care Funding by the NHS

The Flipside 

An immediate care annuity is usually a one-time purchase that cannot be reversed. For example, if your health condition improves a few years after purchasing the annuity, you cannot cancel it and cash-in.

Also, if your healthcare provider anticipates a short life expectancy for you, then there are other annuity options like an enhanced annuity which may be a better choice.

Read more Types of Annuities to know your options and make a wise decision.






Income Drawdown vs Annuity

As the new pension flexibility reforms came into effect in April 2015, it has been estimated that the number of people opting for an annuity would reduce by up to 70% or more.

Since retirees now have a lot more options in accessing their pension pots, why risk being locked with an annuity that may not provide enough retirement income?

What most people do not realize is that more the options you have, greater the risk of making an incorrect decision that you may have to live with.

Irrespective of whether you reached pension age before April 2015 or after it, you must seek independent financial advice before you make any decision regarding your pension pot.

Is Flexi-access drawdown a better choice than buying an annuity with a large part of the pension pot?

Flexi-Access Drawdown

One of the most crucial changes made to Pension Laws, Flexi-Access Drawdown allows you to take a quarter of your pension pot as a tax-free lump sum cash amount and reinvest the remainder into funds of your choice, which will then provide you with taxable income that you can use when you wish.

You can handpick the funds that you think will perform well and be able to produce an income you desire. However, the income may not be permanent and will be dependent on the performance of your investments.

You may choose to start taking the income right after you invest or you may defer it for some time.

Alternatively, you can also convert the remainder of the pension pot into income drawdown which allows you to take small sums of money from it. Each time, 25% of the money can be taken as a tax-free cash amount.

The Risks

The risks of using the Flexi-access drawdown option are many, especially if you are making the decisions yourself.

Here are some of them.

  1. You may be tempted to take out too much money during the earlier years of your retirement
  2. You may start taking a higher income and your investments may not match this level causing your future payouts to reduce
  3. You may outlive your pension pot
  4. There may be limited funds to choose from
  5. Charges may be applicable
  6. You may not be aware of the tax implications

Drawdown and Tax 

Any money that you will withdraw from your pension pot will be added to your yearly income and will be subject to income tax.

If you withdraw larger amounts, then the tax bracket will be higher.

What should I choose?

Your choice depends completely on your personal circumstances and objectives.

  • Are you a ‘risk-averse’ person? Then you are better off choosing the stability that a fixed retirement income can provide you with. Buy an annuity with a part of your pension pot. Once again, there are multiple choices and you should do your research and make a decision.
  • If you can live with capital risk, then you can think about Flexi-access drawdown and invest the remainder in funds. You can draw an income that will not be stable.
  • On the other hand, if your risk tolerance is somewhere in the middle, then you need to work out how much money you can afford to lose before it starts to affect your lifestyle habits. Set a limit and keep the rest aside or use it to secure a retirement income.

Most experts recommend that you at least have a fixed retirement income that can meet your basic expenses. This will ensure that at least your basic standard of living remains protected.

This fixed income can be a mix of a state pension, employment pension schemes and from an annuity that you can purchase with a part of the pension pot.

You can also choose to protect it against inflation so that the buying value of the fund remains the same even after 10 or 15 years.

Seeking Expert Guidance 

No matter how informed you are, it is better off to seek professional advice before making crucial decisions about your pension pot.

You can always consult Pension Wise, the free government-backed service for impartial advice.

Guide to Investment-Linked Annuities

With all the hoopla surrounding the new pension freedom reform and the way it has changed in which a retiree can utilise their pension pot, the dilemma has only increased.

Should one utilise the new flexible income drawdown option or should one continue down the trodden road and buy an annuity?

The only reason why annuities are so popular is that people prefer the long-term stability that a fixed monthly income can provide them with.

To add to this, there is a guarantee that the income will be paid for the rest of the lifetime even if the annuitant lives to be a centenarian.

The catch is that annuity rates are not the best and there is a lot of shopping around to do. To add to this, inflation will keep eroding the value of your fixed monthly income.

In such a circumstance, one must consider investment-linked annuities which offer the best of both worlds.

What is an investment-linked annuity? 

An investment-linked annuity provides you with a guaranteed fixed monthly income (lower than a basic lifetime annuity). The upside is that this income can increase depending on the value of investments like stocks and shares, but will never decrease below the guaranteed amount. This will be paid until your death.

So, essentially, you will receive a fixed monthly amount which will either be more than the minimum guaranteed amount or equal to it for the rest of your lifetime.

There are two types of Investment-Linked Annuities:

  1. With-Profits Annuity: Your pension pot will be invested in the With-profits fund by the annuity provider. The with-profits fund is an investment pool that is usually invested in a broad range of options like shares, cash, bonds and property.
  2. Unit-Linked Annuity: While it is very similar to a with-profits annuity, a unit-linked annuity gives you more control over your investments. You can choose your investment assets, and your income will be dependent on the performance of these units.

Features you can choose

Similar to Lifetime Annuities, you can choose from varied features in an Investment Linked Annuity. These should be according to your current financial circumstance and your future cash-flow requirement.

  • Opt for a Joint-life annuity if you have a dependent spouse or partner (Also called Widow’s Pension)
  • Choose a guarantee period (five or ten) years which may increase the minimum guaranteed payment
  • Select Value Protection wherein any person nominated by you will receive the unused value of your pension pot in the event of your death
  • Opt for enhanced annuity if you are in poor health or have a shorter life expectancy

To get the best rates and features, it is recommended that you shop around for your annuity.

Pros and cons

Retiree’s usually shy away from investment-linked annuities due to the perceived fear of risk. A unit-linked annuity, for example, invests mainly in equities which are usually considered a risky proposition, especially if you are nearing retirement.

On the other hand, a lifetime annuity offers a sense of safety by providing a fixed lifetime income without revealing the fact that the value of this income will reduce with time.

What are the pros and cons of an investment-linked annuity?

Should you opt for it?


  • The With-Profits annuity depends on the provider’s fund value. If this increases, your monthly income can increase significantly.
  • You can customise the initial income to suit your current circumstances by anticipating the rate of return on the investments.
  • If you are planning to continue working or have other income sources, you can opt for a lower monthly income initially which can potentially increase your income in the later stages of retirement depending on how your investments perform.


  • The value of your annuity provider’s funds may fall at any time. This will reflect directly on your monthly income.
  • Specialized Investment-linked annuities have higher charges as compared to basic lifetime annuities. The higher fees can reduce your monthly income during retirement.

Irrespective of what type of annuity you decide to buy, Finance.co.uk recommends that you seek independent professional advice.

You can also use the free guidance provided by the government-backed Pension Wise service.

Shopping for the best annuity

Despite living in the age of the internet, finding the best deal can be more difficult than you think.

The problem only becomes more compound when it is a crucial decision like buying an annuity, which may well be one of the most important financial decisions you will ever make in your lifetime.

After years of saving every penny, when you are finally ready to retire, you must ensure that you get the best retirement income.

And you do not need to buy an annuity offered by your pension provider. Shopping around is your right and in this case, a necessity.

The fact is that retirees in the UK are frequently fobbed off by pension providers selling annuities. A glossy sales pitch, lack of research or pure customer lethargy can make a difference of as much as 31% according to Hargreaves Lansdown.

All said and done, how does one find the best annuity?

What are your financial goals?

If you are on a path to buy an annuity, the chances are that you have an income in mind that you would want in the years to come.

The type of annuity you choose should depend on your current financial circumstances and future financial anticipation.

An FCA accredited independent financial advisor will be the best person to guide you. Alternatively, you can also use the government-backed free Pension Wise service.

Have you made the best of your employment years and saved for the golden years? In other words, do you have any savings and funds tucked away in different nests?

  • If yes, then you may want to opt for a single life annuity which will give you with a higher income in the initial years of retirement.
  • On the contrary, if you have a dependent spouse or civil partner or a child who does not have a pension arrangement of their own, then you may want to think about their survival in the event of your death. A joint life annuity would be a better choice.
  • Is a fixed monthly income for the rest of your life enough for you? Remember that the value of this income will decrease over time due to inflation.
  • You can also choose a type of annuity where your income increases each year in line with rising prices.
  • If you are a smoker or have a health condition that could reduce your life expectancy, then you may qualify for a higher income rate through an annuity called, ‘Enhanced annuity’.

To fully understand what annuity is the best one for you, you must shop around.

What about my pension provider?

Just because you shop around for an annuity, it in no way means that you cannot sign up with your pension provider.

In fact, you can use your pension provider’s annuity quote as a point of reference while shopping around. If you get a better rate that is suited to your financial requirements, then by all means, go ahead.

On the other hand, if your pension provider offers you a ‘Guaranteed Annuity Rate’, then chances are that it will be better than what any annuity provider can give you.

That’s one scenario where you would want to stick to your pension provider.

What should you ask an annuity provider?

Ideally, an annuity provider will ask you a series of questions about your health, marital status and financial status. The annuity which they will offer to you will be based on the answers you provide them with.

You will also be provided with a personalised quote and a personalised illustration that projects why a particular annuity is the best option for you.

In 2013, the Association of British Insurers issued a new code of conduct for pension providers, under which they are bound to provide precise information to retirees about the various options they have. They should also encourage retirees to shop around so that they can get the best rates for their annuity.

If you think that the information provided to you is inconclusive, then you can choose to walk.

Alternatively, you can politely ask them to explain why their product would be the best fit for your financial circumstances.

Remember, a better retirement income might just be around the next corner. Don’t be caught with a lower rate only because you were too lazy to shop around.

Are you looking for a professional financial advisor? Read our article, ‘How to Select a Financial Advisor’ for more information.

Understanding Lifetime Annuities

After years of appearing on the horizon, when retirement finally looms large, the years ahead appear like a haze.

What will retirement life be like? Where will you live?

Can you maintain the standard of living that you are so used to or will there be a drop in lifestyle?

Finally, it all comes down to how well you prepared for the twilight years.

You worked diligently to accumulate every penny that you could and built a small pot that you hope will suffice for the rest of your life.

But with inflation biting away at your savings and increased life expectancy, will your pension pot last as long as you do?

Outliving your pension fund can be a nightmare for most retirees and a lifetime annuity may be the best choice in such a scenario.

What is a lifetime annuity?

In a nutshell, it is a contract between you and an annuity provider (an insurance company) who guarantees to pay you an income for the rest of your life in exchange for a part or whole of your pension pot.

You can choose to draw up to 25% of your pension amount as a cash-free lump sum and use the remainder to buy a lifetime annuity. Alternatively, you can invest the entire pension pot in exchange for your lifetime annuity depending on your individual financial circumstances.

The rule of thumb is that the more you invest to buy an annuity, the more you will be paid every month.

There are two different types of lifetime annuities that you can select and the type you choose, along with the customizations you make, will determine your income for the rest of your life.

Basic Lifetime Annuity 

A Basic Lifetime Annuity offers a bundle of income options that you can select depending on your individual circumstances.

  • Single Life Annuity: If you have no financial dependents or if your spouse or partner has their own pension scheme to rely on, then a single life annuity should be your first choice. In this type of arrangement, you will receive a fixed income for the rest of your lifetime. The payments will stop after your death.
  • Joint Life Annuity: A joint-life annuity is ideal if you have a dependent spouse or partner who does not have a pension scheme of their own. It can also be beneficial if you have dependent children. In this type of annuity, you will receive a fixed monthly income (usually lower than a single life annuity) for the rest of your lifetime. It will then be transferred to your spouse, partner or any nominated beneficiary. In case you nominate your children, it will be paid to them until they reach the age of 23.
  • Fixed Income Annuity: A fixed income annuity will provide you with a fixed monthly income which you and the annuity provider can select beforehand. However, it will not be protected from inflation and if the prices of commodities like food increase over the years, you will be able to buy lesser with the same amount. The advantage of a fixed income annuity is that it starts off with a higher monthly income as compared to an escalating annuity.
  • Escalating Annuity: If you wish to protect your monthly income from inflation, then you can choose an escalating or increasing income annuity. There are two different options that you can choose from.
  1. A preset rate at which your income will rise every year (3 to 4%)
  2. An index-linked option in which your income will be adjusted as per the inflation. If inflation reduces and prices fall, then your income will also subsequently reduce. Alternatively, if inflation rises, then your income will also increase. This protects your monthly retirement income from inflation.
  • Guarantee Period: A monthly fixed income would be paid for a fixed term period (example 10 years) irrespective of whether the annuitant is alive or dead.

Investment-Linked Annuities

Investment-linked annuities are an apt choice if you have other fixed monthly income investments and are willing to take the risk in exchange for a higher monthly payout.

It is directly linked to the performance of your investments. If the investments perform poorly, your monthly income will reduce but not go below a minimum guaranteed amount.

On the other hand, if the investments perform well, the monthly income will increase considerably as compared to a fixed lifetime annuity.

Which should I choose?

Your choice of an annuity should be dependent on your assumptions about future cash flow, your current financial circumstances, your health, dependants if any and your attitude towards risk.               




What are fixed term annuities?

It’s estimated after the new pension reforms, retirees opting for annuities could reduce by up to 75%.

One of the reasons for this reduction is because retirees were often locked with a low annuity rate which they could not change later.

If you are one of the few who do not wish to commit to a lifetime annuity, then a fixed term annuity might be worth considering.

A fixed term annuity aims to provide the best of both worlds, a guaranteed annuity income and the flexibility of a drawdown later.

How it works

In a fixed term annuity, you will receive a guaranteed income for a fixed period which can be between three and twenty-five years. You can choose the amount of income that you wish to receive during this term.

At the end of the term period of the annuity, you will receive a lump sum of money called ‘Maturity Amount’, which can either be paid directly to you or can be invested in a second retirement income product depending on your financial situation then or your health status.

The Benefits 

One of the most important factors that differentiate a fixed term annuity from other types of annuities is that you do not have to commit to features like widows pension or death benefits at the outset for the rest of your lifetime.

Your personal or financial requirements can change at any time, and hence, any choices that you make will only be applicable for the term of the annuity.

At the end of the term, you can reassess your finances and then make an apt decision.

Here are some of the benefits of a fixed term annuity.

  • You can set the level of income you wish to receive from the plan (within government limits). If you opt for a higher income, then the maturity amount you receive at the end of the term will reduce.
  • If you consider that a drawdown is too risky but are not ready to lock-in your pension pot for life, then this is a great option to receive a fixed income for a specified number of years.
  • You have the flexibility to choose a single annuity, a joint annuity or a fixed income or an investment-linked income.
  • At the end of the term, the annuity rates may be higher which may allow you to receive a higher income.
  • Your health condition may not be the same after a decade. You may then qualify for an enhanced annuity which will give you a higher monthly income.
  • In the event of your death before the term is complete, a nominee (dependent spouse or civil partner) or your estate will continue to receive the full monthly income at the agreed rate and will also receive the maturity amount at the end of the term.

What’s the catch?

As is the case with all pension schemes, a fixed annuity plan may not be the right one for you in all circumstances.

  • To receive the full maturity amount, you must keep the plan for the entire term agreed at the outset. If you change your mind midway or have a sudden urgency for funds, and decide to cash in, then you may lose the funds.
  • The income will not change for the entire plan term. If your financial circumstances change, it may not be enough.
  • The annuity rates may fall by the time your plan term ends. If you chose to receive a higher income during the term, the maturity amount you receive would be lower. Subsequently, it may not be enough to buy the same retirement income in the years to come.
  • If your health deteriorates midway of the fixed term, you risk losing out on the maturity amount if you cash in. So, despite being eligible for an enhanced annuity, you will have to continue with the fixed term annuity.

Is it the right choice for me?

Retirees now have more flexibility in the way they use their pension pot. Speak to an independent financial advisor to understand your options and what’s the best choice for your retirement.

If you are looking for a professional financial advisor, you can read our article, ‘How to Select a Financial Advisor’ for more information.

Fixed vs Increasing Life Annuity

One of the most difficult choices that retirees often face when looking to select an annuity is whether to opt for the instant riches offered by a fixed annuity or opt for an escalating annuity to safeguard the income from the inflation demon.

A common mistake is to be allured by the higher starting income provided by the fixed or level annuity without fully understanding how it will impact your lifestyle in the years to come.

As always, your choice of annuity is a very personal decision that depends on multiple factors like your health, your financial circumstances, your lifestyle, your lifestyle goals for the retirement years and healthcare costs.

But if you are standing at that crucial juncture twiddling your thumb, then let’s take a closer look and compare what each type of annuity has to offer.

Fixed Income Annuity

A fixed income or a level annuity will pay you a fixed income for the rest of your lifetime. It starts off with a higher yearly annuity payment as compared to other types of annuities. But the payments will taper down with time but not go below a minimum guaranteed payment.


  • You will receive a higher amount to start with.
  • You will know beforehand what your retirement income will be, allowing to you plan ahead


  • Since you will receive the same amount year after year, inflation will erode its value with its sandpapered tongue.
  • You will be able to buy lesser with the same amount after a decade
  • The payment will be lesser during the later stages of the annuity

Is it the right choice for you?

If you have multiple pension pots and other funds tucked away that will cover you in the later stages of retirement; then you can take advantage of the higher income payout in the earlier years, offered by a fixed income annuity.

On the other hand, if you anticipate high healthcare costs in the later years, then you should consider other options.

Escalating or Increasing Annuity

An increasing or escalating annuity will provide you with an ‘inflation-proof’ retirement income.

There are two types of escalating annuities.

  • Index Linked: Your annual income will be adjusted according to a designated level of inflation which is usually based on the Consumer Price Index or the Retail Prices Index. So, if inflation rises, your income increases too. On the contrary, if inflation reduces as it happened in April 2015, your income may reduce also. But its buying power is retained no matter which way the prices go.
  • Increasing Rate: Your income will increase every year at a set rate which can be selected by you at the start of the annuity term. It can be between 0.8 to 5%. The rule of thumb is that the higher the percentage by which you want the income to increase each year, the lower the starting income will be.


  • Your monthly income stays inflation-proof, and its buying power does not erode with time
  • Your income may increase in the later stages of retirement which may be beneficial if you anticipate healthcare costs.


  • You may receive a much lower monthly income than what a fixed income annuity would provide you, especially if you choose a high annual rate of increment.
  • Some annuity providers set a cap on the maximum annual increase that you can get. Ensure that you read the fine print and know what you are purchasing.

Is it the right choice for you? 

If you have other income sources at this point in time, then you can opt for an increasing annuity. Despite having a lower income to start with, you will be well protected against inflation which can be beneficial in the later stages of retirement.

Most people underestimate the amount of time they may spend in retirement. On an average, you should expect to live at least 20 years in retirement. In the last decade, inflation has led to an average price increase of 3 to 4%.

Make the right choice

Ensure that you compare both options and then make an informed decision.