Conventional Annuity

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Your lifetime annuity or standard annuity...

A conventional annuity also known as a Level, Lifetime or Standard annuity will provide you with a known and guaranteed annual income for the rest of your life. There are a number of different types of annuity available, on which more information can be found in our annuities buying guide.

The amount payable is determined by the rate offered by the annuity provider at the time you buy the annuity, together with the size of your pension pot. For example pension savings of £500,000 at a rate of 6% will give an income of £30,000 per year.

Factors that influence the rate you’ll be offered include your age, gender, postcode and your health. If you live in an area with a higher mortality rate for example you’ll be quoted a higher rate, as providers will assume you have a shorter life expectancy. If you are in poor health you may be entitled to an enhanced annuity, which may give you a higher income than a conventional annuity. The annuity rate offered is also effected by the performance of the provider’s investments at the time you chose to buy, so annuity rates vary year on year.

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Like most financial investments there are advantages and downsides. A major benefit of a conventional annuity is that it will continue to pay the regular income no matter how long you live, even if this amounts to more than your pension pot. However, if you have chosen a single life annuity and die before you’ve received your entire pension fund your estate may not get back all the remaining money. This is the case even if you die shortly after setting up the annuity. A joint life policy will continue to pay your partner or named beneficiary on your death, but is offered at a lower rate.

You will need to decide if you want an escalating annuity (an income that increases over time) or not. Level annuities remain fixed at the initial rate and don’t protect you against inflation increases, but do provide a higher starting income than escalating annuities. Escalating annuities that increase with inflation or increase by a fixed percentage generally provide a starting income up to 33% less than a level annuity.

It’s important to remember once you’ve bought a conventional annuity it’s literally yours for life. You aren’t able to switch providers for a better rate or withdraw your money to invest elsewhere, but you will know exactly how much money you’ll receive each year. Conventional annuities are favoured because they provide a stable, guaranteed income enabling you to budget and enjoy retirement, without the risk of your hard-earned pension savings devaluing on the stock market.