How do I buy an annuity? A step-by-step guide
If you're approaching retirement and want the reassurance of a secure, guaranteed income for life, an annuity can be an appealing solution. But like any major financial decision, buying an annuity involves key choices that can significantly affect your long-term outcomes.
The process can seem complex but with the right guidance, you can navigate it confidently and ensure your retirement income is structured around your personal goals and financial needs.
Here’s a step-by-step guide to help you understand, evaluate, and purchase an annuity with clarity.
1. Understand what an annuity is
An annuity is a financial product designed to convert your pension savings into a regular income, usually guaranteed for life. In exchange for a lump sum typically from a defined contribution pension pot, you receive an income that can be fixed, inflation-linked, or tailored with additional benefits.
Annuities remove two major retirement risks:
Longevity risk: The danger of outliving your savings.
Market risk: The volatility that comes with remaining invested in retirement.
For many retirees, particularly those who value certainty or are less comfortable managing investments later in life, an annuity can offer essential peace of mind.
2. Review your pension options
Before buying an annuity, it’s essential to assess your pension savings and retirement strategy as a whole. If you have a defined contribution (DC) pension, you can usually take up to 25% of your pension pot tax-free, with the remaining funds available to purchase an annuity or invest via drawdown.
If you have multiple pension pots, consider consolidating them into one scheme for simplicity and potentially greater purchasing power. Be cautious, however, if you have defined benefit pensions or safeguarded benefits, as transferring these requires regulated financial advice and may not be in your best interest.
Tip: Review any existing pension documentation to check your entitlements, options, and restrictions. If you're unsure, seek professional guidance early in the process.
3. Decide what type of annuity you need
Not all annuities are the same. Selecting the right type is key to matching your annuity to your lifestyle, risk tolerance, and family circumstances.
Here are some of the main options:
Lifetime annuity: The most common type, paying a guaranteed income for the rest of your life. You can choose a level (fixed) or escalating income.
Enhanced annuity: Offers higher income rates if you have certain health conditions, smoke, or have a lower life expectancy. It's vital to disclose medical history fully.
Joint life annuity: Continues to pay an income to a spouse or partner after your death, either partially or in full.
Inflation linked annuity: Income rises in line with inflation (e.g. RPI or CPI), helping maintain purchasing power over time.
You can also add features such as guaranteed payment periods, value protection, or escalation rates but each will affect the annuity’s starting income.
Tip: Think about your essential expenses versus discretionary spending. An annuity can cover the former reliably, while investments or drawdown can support lifestyle extras.
4. Shop around for the best rate
Annuity rates can vary significantly across providers. Even a small difference in rate can equate to thousands of pounds in additional income over your lifetime.
You are not obliged to purchase an annuity from your existing pension provider. In fact, using the open market option which allows you to shop around and compare annuity quotes almost always leads to better value.
Tip: Use an annuity broker, independent financial adviser, or pension comparison tool to access a wide range of rates, particularly if you're eligible for an enhanced annuity.
5. Get professional advice
Buying an annuity is a decision that’s usually irreversible, so getting it right is critical.
A qualified financial adviser can:
Evaluate whether an annuity is the most suitable income option for your retirement goals.
Help compare different providers and structures.
Structure your annuity in a tax-efficient way, particularly if combined with other income sources like ISAs, investments, or rental income.
Coordinate your annuity with estate planning goals, helping ensure your wealth is preserved where appropriate.
Tip: Advisers regulated by the FCA are required to act in your best interests and provide clear, written recommendations tailored to your circumstances.
6. Finalise the purchase
Once you've selected the right annuity product and provider, your adviser (or pension provider) will guide you through the purchase process:
You may need to complete medical questionnaires (if applying for an enhanced annuity).
Your adviser will handle the paperwork and arrange the transfer of funds from your pension scheme.
The annuity provider will then confirm the income start date, payment frequency, and tax arrangements.
Once set up, your annuity income will be paid into your bank account on a regular basis either monthly, quarterly, or annually, depending on your preferences.
Tip: Keep copies of all documents and review them annually to ensure your income continues to meet your needs alongside any other income streams.
Planning with confidence
An annuity can form the bedrock of a retirement plan, providing certainty in an uncertain world. It’s not the right choice for everyone, but for those seeking simplicity, stability, and a hands-off approach to retirement income, it offers a powerful solution.
The key is to approach the decision strategically, not reactively. Consider how an annuity might integrate with drawdown, other savings, or state pension benefits to form a well-rounded, tax-efficient income strategy.
Thinking about buying an annuity?
At Oculus Wealth, we provide expert, impartial advice to help you structure your retirement income with clarity and confidence. Whether you’re evaluating annuities, drawdown, or a blended approach, we’re here to guide you every step of the way.
Book a consultation today to explore your options and make an informed, confident decision about your financial future.