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Annuities: What is a Pension Annuity?

A standard pension annuity is an arrangement where a lump-sum investment is made. From the investment you will receive a guaranteed level of retirement income. There are also alternative types of annuities that provide greater flexibility. Most annuities are bought using funds held in money purchase pension schemes.

In other words, an annuity converts a savings fund into income and that income will be paid to you for long as you live. The annuity is payable for the remainder of you life after it's been purchased, although it's possible to select a fixed period if purchasing an annuity with cash rather than pension funds.

Examples of these types of "Compulsory Purchase Annuity" are conventional annuities, with profit annuities and unit linked, or 3rd way annuities. Annuities that are bought from savings, not from a pension scheme are referred to as Purchase Life Annuities or Immediate Vesting Annuities.

Annuity Information: Tax Free Annuity Cash

You're normally entitled to take up to twenty five percent of your pension fund as tax free cash. Your annuity will be treated as pension income under UK Pay-as-You-Earn tax rules.

An Annuity is for Life

This could be one of the biggest financial decisions that you will ever make, so you must ensure that you maximise your annuity income. Once you buy an annuity you can't change your mind afterwards. You need to ensure you get it right first time.

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Annuity Information: Types of Annuity:

There are a wide range of options which can be selected when choosing an annuity plan. The most widely used annuity options are listed below.

Minimum Term Annuity

Income is guaranteed to be paid until the death of the annuity holder (annuitant), but it can also be modified to include any of the following options:

• 5-year annuity guarantee - annuity ceases at death of annuity holder, or after 5 years, whichever is the longest

• 10-year annuity guarantee - annuity ceases at death of annuity holder, or after 10 years, whichever is the longest

• Joint life annuity - annuity ceases on the death of the second of two named annuity holders

Annuity Spousal Benefits

For joint life annuities there will be three survivor options. Your spouse, partner or dependant can be protected after your death if you choose one of the following options:

• Reduction to 50% benefit,
• reduction to 66.6% benefit or
• 100% benefit

You have to decide upfront how much your spouse, partner or dependant's pension will be and when you die the annuity continues to be paid to your spouse, partner or dependant at the annuity rate you opted for.

The annuity is thus adjusted to the new level at the death of the annuity holder or at the end of the guarantee period (if this has been selected) and then continues until the death of the spouse, partner or dependant.

Value Protection

When you take out an annuity, if you wish, you can choose value protection. Value protection is sometimes known as annuity protection.

If you die and you have not received the full amount of your pension fund, value protection returns a lump sum to your beneficiaries. It is sometimes known as annuity protection.

You have the option to protect just a percentage of your pension fund, or even the full amount.

The amount paid on your death will be the percentage of your pension fund that is protected minus the total gross income already paid to you as an income. There are tax implications to value protection, so it important to discuss all aspects of this option with your annuity specialist.

Annuity Information: Annuity Escalation

An annuity can either be paid at a fixed level or can include an escalation at 3 percent, 5 percent, or at the RPI percentage (annual increase in the Retail Price Index) - you can choose to compensate for any inflationary effects on your retirement income. However, your initial income level will be reduced if you choose escalation. Your annuity specialist can look at a range of annuity options with you to help you decide on the best option for your particular circumstances.

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Pension Funds: Pension Types?

You can buy an annuity if you have one of the following pension types:

 1. Personal Pension
 2. Stakeholder Pension
 3. Occupational Money Purchase Scheme
 4. Retirement Annuity Contract (RAC)
 5. Free Standing Additional Voluntary Contribution Scheme (FSAVC)
 6. Most Additional Voluntary Contribution Scheme (AVC)
 7. Section 32 Policy (Buy Out Bond)

Pension Funds: Converting Pensions From?

Major pension companies that provide the monetary management behind the UK's pension industry.

 Abbey Life
 Allied Dunbar
 AXA Sun Life
 B&CE Insurance
 Bank Of Scotland
 Canada Life
 CIS Co-operative Insurance
 Clerical Medical
 Countrywide Assured
 Direct Line
 Eagle Star
 Equitable Life
 F&C Management
 Fidelity Investments
 Friends Provident
 GE Life
 Hargreaves Lansdown
 Legal and General
 Lloyds TSB
 London Life
 Merrill Lynch
 National Deposit Friendly Society
 National Westminster
 NFU Mutual
 Northern Bank
 Nothing Ventured
 Pearl Assurance
 Pensions Trust, The
 Printing Industry Stakeholder Pensions
 Royal Liver Assurance
 Royal London
 Royal Skandia
 Schroders Pension Store
 Scottish Amicable
 Scottish Equitable
 Scottish Friendly
 Scottish Legal Life
 Scottish Life Assurance
 Scottish Life
 Scottish Mutual
 Scottish Provident
 Scottish Widows
 Skandia Life
 Standard Life Investments
 Standard Life
 Sun Life Financial of Canada
 Teachers Provident Society
 Trades Union Congress (TUC)
 Tunbridge Wells Equitable
 Virgin Money
 Windsor Life
 Winterthur Life
 Yorkshire Bank
 and many other Pension Providers

Pension Funds: Your Pension Annuity From?

Some of the leading pension UK annuity providers.

 Aviva Annuities
 Canada Life Annuities
 Clerical Medical Annuities
 Friends Provident Annuities
 Just Retirement Annuities
 Hodge Lifetime Annuities
 Legal & General Annuities
 Liverpool Victoria Annuities
 MGM Annuities
 Partnership Annuities
 Prudential Annuities
 Scottish Equitable Annuities
 Scottish Life Annuities
 Scottish Widows Annuities
 Standard Life Annuities
 and many other Annuity Providers

Annuity Alternatives: Purchased Life Annuity: An Annuity With a Difference

A purchased life annuity is an annuity purchased with your own funds (savings), as opposed to from a money-purchase pension fund. This type of annuity operates in the same way as a compulsory purchase annuity, but has tax advantages.

The entire pension that you receive from a compulsory purchase annuity is treated as taxable income in the same way as income from normal employment. But when you buy a purchased life annuity, that part of the annuity income, which is calculated as capital repayment to you, is free of tax. Only the portion of your annuity income that is interest-paid on your investment is taxable.

With similar annuity rates, the effect of this tax treatment of a purchased life annuity, for a basic-rate tax payer from a £200,000 investment would be to increase their net retirement income by somewhere in the region of £200 per month.

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Annuity Information: The Open Market Option for Buying Annuities

The Open Market Option allows retirees to shop around for varying ways to convert their pension funds into an annuity or annuity alternative, as opposed to just settling for the rate offered by their pension provider.

Annuity Information: Pension Providers Annuities Information

When your pension fund reaches its maturity, your pension provider will write to you to advise you of the fund value and give you general information about annuities and the level of annuity income you would expect from them.

You are now entitled to use your Open Market Option, which allows you to transfer the pension fund value to the annuity provider of your choice. This enables you to take advantage of a possible higher annuity income which may be available from a different provider. Annuities are usually provided by insurance companies.

Annuity Information: Reduced Annuity Rates

Unfortunately, many of those who retire still do not use their Open Market Option. This is not just because they are not aware of the benefits of doing so, but they do not actually realise that they have an option at all. It has been claimed that those at retirement who do not use their option and take the default annuity offered by their pension provider may be missing out on up to as much as 40 percent more retirement income.

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FCA Annuity Information: Open Market Option

The Financial Conduct Authority (FCA) is an independent body set up by government to regulate the financial services industry and to protect consumers. The FCA encourages people to use the open market option saying that by shopping around you may be able to increase the annual income you get from the annuity bought with your pension savings. The Open Market Option allows those with accumulated pension savings to choose the provider from which they buy their annuity.

Annuity Information: Will You Receive the Correct Annuity Income?

According to the professional pensions publication, DC World, it is estimated that over £1 billion in pensions was lost by failure to get proper advice on the best-selling annuity.

To make the most of the Open Market Option, it's important that you speak to a Whole of Market Financial Specialist who'll explain the different annuity options and alternatives to annuities that are available.

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Annuities: Enhanced Annuities / Impaired Annuities

If you are in advanced years, a smoker or have impaired health (or have had impaired health in the past) you may be able to increase your retirement annuity income.

Some pension annuities, called "Enhanced Annuities" or "Impaired Annuities", pay more than standard annuities because those in better health tend to live longer than the average person. The annuity providers therefore have to pay out more over the healthier person's retirement so their yearly income is usually lower. This is why it's crucial to report any health problem to your specialist, no matter how small you think it is. It may get you a higher annuity rate of return.

This is also the case if you smoke ten or more manufactured cigarettes or use 85mg of rolling tobacco a day.

Even though you may regard yourself to be in quite good health, the reality can often be surprisingly different. Some think they have to suffer from a serious medical condition such as heart disease, cancer or stroke to receive extra annuity income, but a seemingly mild condition or complaint may substantially increase your annual retirement income.

In fact, if you have one of nearly 1500 ailments, such as being overweight, high blood pressure, asthma, rheumatoid arthritis, angina, heart problems etc., you must ensure you mention it to your specialist.

Annuity Information: Additionally, higher annuity incomes are often achieved by:

• Those who have retired from certain occupations
• Those who live in certain parts of the country

Many could boost their annuity income with an "enhanced annuity". If you believe that you fit this category, it is extremely important that you tell our team of annuity experts about it. You will stand a better chance of a higher annuity income for the rest of your retirement.

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Annuity Information: Pension Annuities for Smokers

If you are a smoker, annuity providers factor in that you are more likely to die sooner than the average person who doesn't smoke. They therefore assume that they'll not be paying your annuity to you for as long. A presumed shorter retirement lifespan therefore means that smokers can increase the amount of annuity income that they receive.

Annuity Information: Older Smoker

As a smoker, you may already be entitled to receive a higher pension income, but also, dependent on your age, you may receive further enhanced annuity rates of up to 30 percent above the standard level annuity rate. For example, if you normally would receive £1,000 per year as a non smoker, you could receive as much as £300 per year more as an older smoker.

In the case of enhanced annuities it can actually pay to be older and in poor health!

Annuities Up in Smoke

The average British smoker spends £92,000 on cigarettes in a lifetime, according to research by Clerical Medical, enough money to buy an annuity of approximately £6,000.

For each smoker that's a breathtaking 373,302 cigarettes smoked and 18,665 packets purchased.

On a yearly basis that breaks down to £1,500 spent on tobacco, which works out to 6,060 individual cigarettes (303 packets).

In a day a smoker burns through 15.24 cigarettes, which in a week totals 106.68, but with the normal smoker admitting to an increase in their usual daily quota when they go out, that weekly figure tops 116.

Annuity provider Clerical Medical's survey of 3,000 people found UK smokers collectively get through 72 billion cigarettes a year (3.6 billion packs), costing a shocking £17 billion. Laid out in a line all those cigarettes would stretch over four million miles, and circumnavigate the earth 154 times.

John Hiew, Managing Director of Clerical Medical, said: "We all know about the health problems associated with smoking but we wanted to find about out the wealth implications associated with the habit."

He continued, "It's a staggering amount of money British smokers spend whichever way you look at it, and that's a hell of a lot of disposable income just going up in smoke. If people were to consider putting the money they spend each month on cigarettes into a savings plan not only would they probably live longer, but they could have an extra income of thousands of pounds a year."

Even social smokers "who only light up when they go out to bars, clubs or restaurants" spend over 11,000 in a lifetime. Part-timers still manage to inhale 14.55 cigarettes a week, in a year that stacks up to 756 fags (37 packs), which equals 186 per year.

Clerical Medical's research also revealed that 83 per cent of respondents have tried giving up smoking at least three times. A third admitted that they lasted only a couple of days, while the same amount crumbled after two months, while 15 per cent managed a year. Startlingly one in ten people said they sparked up again after more than twenty years of resisting the temptation to smoke.

Northern Ireland folk emerged as the biggest smokers, ahead of Londoners and those from the North West.

In order, the following are the regions where you're most likely to be a smoker and therefore more likely to get a higher annuity:

1. Northern Ireland
2. London
3. North West
4. East Anglia
5. South West
6. Yorkshire
7. South East
8. Wales
9. Midlands
10. Scotland

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Annuity Information: The Argument Against Annuity Calculators and Rate Tables

You may already have visited other annuity sites and used an annuity calculator or consulted an annuity rate table.

• Were you 100% sure that the information was in date?

• Did the calculator or table take into account all of the annuity products on the market or was it just a selection?

• Were the alternatives to annuities explained?

• Did you know that Financial Conduct Authority (FCA) registered whole of market annuity specialists may have access to a wider range of retirement annuity possibilities?

• Was it an individual annuity quote or just an illustration?

• Did the website promote particular providers over others as they were remunerated higher by some companies?

• Are the annuity providers able to pay to list their services higher up the tables, or maybe have their products shown in a different way?

• Did you know that the annuity rates may change before your application actually goes through? If you received a quote, was it guaranteed?

Annuity Rates and Calculators: Updated by machines or humans?

Did those sites use 'screen-scraping' technology that retrieves and transfers information from other programmes?

According to Wikipedia, "Screen scraping is generally considered an ad-hoc, inelegant technique, often used only as a "last resort" when no other mechanism is available. Aside from the higher programming and processing overhead, output displays intended for human consumption often change structure frequently. Humans can cope with this easily, but computer programs will often crash or produce incorrect results."

Annuity Rates and Calculators: But the site said it was up to date

Even if the annuity comparison table or annuity calculator was 100 percent up to date and correct, were you aware that the stated rates may have no resemblance whatsoever to the income that you'll actually achieve? This is because your annuity may increase due to circumstances as yet unknown to the site, i.e. your state of health, medication that you may be taking and whether you're a smoker or not. Some annuity providers even base your future income on your previous occupation or where you live, specifically, your postcode.

So let's say that you do eventually find a site where everything is up to date and works correctly; do you know at this stage whether you want a level annuity, fixed-rate escalating annuity or an rpi-linked escalating annuity? Also, have you considered your spouse's, partner's or dependant's percentage on your death? Have you considered an unsecured pension or variable annuity? There are a bewildering array of choices.

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Annuity Information: Can I Just Use What I've Learned Here to Buy an Annuity?

The annuities information on this website does not represent financial advice. It is very important that you do not use this annuity information in isolation to decide which annuity or annuity alternative to buy. Annuity and pensions information or opinions expressed are made as at the date of publication and are subject to change without notice. You must consult an annuity specialist for complete information. "The Argument Against Annuity Calculators and Rate Tables" is opinion only and you shouldn't rely on the information to make (or refrain from making) any decisions about buying an annuity or annuity alternative. Remember, always seek the help of an annuity specialist.

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Annuity Information: Why Use an Annuity Specialist?

1. A specialist may be able to secure a better annuity deal or annuity alternative than you may be able to achieve by yourself.

2. A specialist is more likely to have access to a wider range of annuity possibilities from the providers than you have.

3. Due to specialists ongoing relationships with annuity providers, they may be in a better position to deal with any problems that may arise with your application.

4. You will have one point of contact should anything need prompt attention or go wrong.

5. Our specialists work to a stringent set of guidelines and rules laid down by the Financial Conduct Authority (FCA) who regulate working methods and policies.

6. Annuity specialists have got an interest in recommending the correct product or service for your particular circumstances. They will not wish to fall foul of strict Financial Conduct Authority (FCA) regulations.

7. If you choose not to get Financial Conduct Authority (FCA) registered specialist advice, you may not be able to get compensation through the Financial Services Compensation Scheme (FSCS) if you have a future complaint about the recommended product or service.

8. According to the "Fairness Index" produced by the Financial Services Research Forum at Nottingham University, IFAs are the most trusted practitioners in financial services winning the highest ratings on overall fairness. It places them significantly higher than building societies, investment companies and life insurers. The Fairness Index encompasses a wide range of points including impartiality, courtesy and communication.

Income Drawdown/Pension Release

As an alternative to an immediate annuity purchase, you can choose to release your pension funds using income drawdown .

Income drawdown lets you control your own income instead of getting a regular, set sum from an annuity provider.

You are able to access your full retirement savings and invest and withdraw money as you wish, instead of being tied to an annuity.

With income drawdown you also retain ownership of your pension fund and can therefore pass remaining funds on when you die.

Using income drawdown as a first option can give you time to make a final decision on how to fund your retirement - for instance you might eventually choose to purchase an annuity at a later date.

Save Time While Improving Your Annuity Income

Using SPECIALIST ANNUITY INDUSTRY SEARCH SOFTWARE, an FCA registered Whole of Market Financial Specialist will query top annuity and annuity alternative providers' databases to help you compare and choose which is the best option for you.

Just supply us with a few details and a Financial Conduct Authority (FCA) registered annuity specialist will contact you with an explanation of which type of annuity or annuity alternative is likely to suit you best and provide the most income. This contact is free of charge and you will have absolutely no obligation to proceed.

The team manning Annuity Link are fully qualified, FCA registered whole of market financial specialists. Unlike tied specialists, we must recommend solutions from the entire range of annuity products available.

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Annuity Links

  • Standard Annuity
    Annuities: what is a pension annuity?
  • Enhanced / Impaired Annuity
    Annuities: Are you in poor health? You could increase your annuity rate
  • Open Market Option
    Annuity Information: Retirees can shop around for varying ways to convert their pension funds into an annuity or annuity alternative, as opposed to just settling for the rate offered by their pension provider

Annuity Information

  • Annuities for Smokers
    Annuity Information: Smokers can increase the amount of annuity income that they receive
  • Spouse Benefits
    Annuity Information: Your spouse, partner or dependant can be protected after your death
  • Value Protection
    Annuity Information: When you take out an annuity, if you wish, you can choose value protection.
  • Minimum Term Annuity
    Annuity Information: Annuity income is guaranteed to be paid until the death of the annuity holder, but it can also be modified to include certain options
  • Annuity Escalation
    Annuity Information: An annuity can either be paid at a fixed level or can include an escalation at 3 percent, 5 percent, or the Retail Price Index percentage
  • FCA Open Market Option Advice
    FCA Information: The FCA encourages people to use the open market option
  • Why Use an Annuity Specialist
    Annuity Information: There are many important reasons why you should always seek help before buying an annuity or annuity alternative
  • Why We Don't Show Annuity Rates
    Annuity Information: The argument against unreliable annuity calculators and annuity rate tables
  • How Do You Get Paid
    Annuity Link Information – How is it possible that an Annuity Link enquiry is free?

Pension Funds

  • Income Drawdown/Pension Release
    Income Drawdown (sometimes known as pension release) is an alternative to an immediate annuity purchase.
  • Annuity Providers
    Pension Funds: A list of possible annuity providers that could convert your pension fund into an annuity
  • Pension Types
    Pension Funds: The various pension types that can be converted into an annuity
  • Pension Providers
    Pension Funds: A list of pension providers that could be supplying the funds for your annuity

About Annuity Link

Copyright © Annuity Link - UK Pension Annuity Rates and Annuity Alternative Comparisons. Annuity Link is an advertising initiative for Retirement Solutions (UK) Ltd. Retirement Solutions (UK) Ltd is authorised and regulated by the Financial Conduct Authority. Retirement Solutions (UK) Ltd (registered in England and Wales no. 06437737) and have their registered office at Third Floor, North Wing, Metropolitan House, Station Road, Cheadle Hulme, Cheshire, SK8 7AZ. FCA Number 483817. Retirement Solutions (UK) Ltd is covered by the Financial Ombudsman Service and Financial Services Compensation Scheme - details available on request.