Conventional Lifetime Annuity
Written by
David
Reviewed by
Richard
Date
March 2025
What is a lifetime annuity?
How much income will a lifetime annuity provide?
Does health impact annuity income?
Level vs. escalating lifetime annuities
Lifetime vs. fixed term annuities
What death benefit options are available?
Do I need to buy an annuity through my pension provider?
How is a lifetime annuity taxed?
Benefits and risks
Next steps
What is a lifetime annuity?
A lifetime annuity is a financial product that provides a guaranteed income for the rest of your life. It allows individuals with defined contribution (also known as money purchase) pension savings to convert part or all of their pension pot into a secure income stream that continues until death.
The amount you receive is primarily determined by the size of your pension fund and the annuity rate offered by the provider at the time of purchase.
Payments can typically be made monthly, quarterly, half-yearly or annually. The frequency and timing of these payments can influence the income amount.
For instance, choosing to receive income annually in arrears may result in a slightly higher annual amount compared to monthly payments.
However, many opt for monthly payments to align with budgeting preferences.
A key feature of a lifetime annuity is its immunity to fluctuations in investment markets or interest rates. The income level is fixed at the outset, offering predictability.
However, this also means you will not benefit from any future rate increases or investment growth.
How much income will a lifetime annuity provide?
Your retirement income from a lifetime annuity depends on several variables, including the amount in your pension pot, the annuity rate available at the time, your age, and other personal details. Annuity rates reflect prevailing interest rates and the provider’s assessment of your circumstances.
There can be notable differences in rates between providers, and the offer from your existing pension scheme may not always be the most competitive.
Does health impact annuity income?
Yes, personal health and lifestyle can influence the income you’re offered. A standard or ‘conventional’ annuity assumes no specific health concerns. However, individuals with certain medical conditions or lifestyle factors—such as smoking or drinking—may qualify for an enhanced annuity.
Enhanced annuities are designed to provide higher income based on the expectation of a shorter life span.
More than 1,500 health conditions and lifestyle indicators may qualify for these rates. Even conditions managed by medication, such as high blood pressure or diabetes, could make a difference.
While the assumption is reduced life expectancy, many enhanced annuity recipients live for decades.
Level vs. escalating lifetime annuities
When selecting a lifetime annuity, you can choose between a level or escalating income structure:
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Level annuity: Pays the same amount each year, offering consistency, but does not keep pace with inflation.
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Escalating annuity: Starts at a lower level than a level annuity but increases over time, either by a fixed percentage or in line with inflation (such as the Retail Prices Index).
While escalating annuities may offer long-term protection against the erosion of purchasing power, they can take many years to catch up to—and exceed—the income provided by level annuities. The best option will depend on your age, financial outlook, and retirement goals.
Lifetime vs. fixed term annuities
A lifetime annuity ensures income for life, whereas a fixed term annuity pays income for a defined period—typically between one and 25 years. Many people opt for terms between five and ten years.
Fixed term annuities offer greater flexibility. After the term ends, you may choose to:
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Purchase another annuity (lifetime or fixed term)
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Enter pension drawdown
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Withdraw some or all of the remaining fund (subject to tax)
You may also choose to leave part of your pension untouched during the term, with the intention of securing a maturity amount to use later. This feature provides flexibility for those who want to reassess their options at a later stage.
What death benefit options are available with a lifetime annuity?
Lifetime annuities offer various death benefit options to provide financial support for others after your passing. These typically include:
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Joint life annuity: Continues to pay income to a nominated beneficiary—such as a partner or financial dependent—after your death. The beneficiary does not need to be a spouse or civil partner.
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Guarantee period: Ensures income is paid for a minimum number of years, even if the annuitant passes away earlier. For example, if you choose a five-year guarantee and die in year two, your beneficiary receives income for the remaining three years.
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Value protection: Allows a portion (e.g. 50% or 100%) of your original pension fund to be paid as a lump sum to a beneficiary upon your death, less any income already received.
Including death benefits generally results in lower personal annuity income, so it’s advisable to review options carefully before committing.
Do I need to buy an annuity through my pension provider?
No. While your current pension provider may offer an annuity, you’re not required to purchase it through them. You have the right to use the Open Market Option, which allows you to shop around for a potentially better rate.
According to a 2016 report by the Financial Conduct Authority, many individuals could have accessed higher annuity income by purchasing from a different provider. Since not all providers deal directly with the public, working with an intermediary may help streamline the process and access more competitive offers.
How is a lifetime annuity taxed?
Before buying an annuity, you can usually take up to 25% of your pension pot as a tax-free lump sum. Any subsequent income or lump sum payments from the annuity are subject to UK income tax at your marginal rate.
If you die before age 75, annuity death benefits are typically paid tax-free to your nominated beneficiary. If you die at 75 or older, the income or lump sum paid to your beneficiary is taxed as their income.
Benefits and risks of a lifetime annuity
Risks:
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Inflation: Fixed income loses purchasing power over time. Escalating annuities are available but start with lower payments.
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No death benefits unless added: Without them, income stops when the annuitant dies.
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No investment growth: Once purchased, the annuity does not benefit from future market gains.
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Inflexibility: Annuity terms generally cannot be changed once the contract begins.
Benefits:
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Certainty: Provides secure, predictable income for life.
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No investment risk: Not linked to market performance.
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Customisable: Can include death benefits or inflation protection.
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Enhanced options available: Higher income possible for those with qualifying health or lifestyle conditions.
Lifetime annuities may appeal to those prioritising stability and predictability in retirement. However, it’s important to weigh the benefits against potential limitations and consider all options before making a decision.
Next steps
Want to see how much income you could really get?
Check the latest annuity rates or get a personalised quote now through Legal & General, Aviva, or use Retirement Line’s annuity calculator to get an up-to-date forecast — it only takes a minute to get started.
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