What Is a Conventional Lifetime Annuity?

If you’re looking for a way to turn your pension savings into a reliable income for life, a conventional lifetime annuity might be worth considering.

Also known as a lifetime annuity, it provides a guaranteed income that won’t run out, no matter how long you live. Once it’s set up, your income stays fixed—or increases, depending on the type you choose—and isn’t affected by changes in the stock market or interest rates.

In this guide, we’ll walk you through how lifetime annuities work, the pros and cons, and what to consider before committing.

How Does a Lifetime Annuity Work?

A lifetime annuity allows you to use your defined contribution pension pot (or part of it) to secure a guaranteed income for the rest of your life.

Here’s how it works in practice:

• You use some or all of your pension pot to buy an annuity from a provider.
• They then pay you a regular income—monthly, quarterly, half-yearly, or annually—for life.
• Your income is based on your pension pot size and the annuity rate you’re offered at the time.

The timing of your payments can also affect how much you receive. For instance, if you choose to be paid annually in arrears, you’ll generally get more income than someone paid monthly. But if you’re used to getting a salary every month, a monthly annuity may feel more familiar.

Once your annuity is in place, it’s locked in—offering stability and peace of mind. But you won’t benefit if interest rates go up in future or if investment markets perform well.

How Much Income Will I Get?

The income from your lifetime annuity depends on several factors:

• The size of your pension pot
• Your age when you buy the annuity
• The type of annuity you choose (level or escalating)
• The annuity rate available at the time
• Whether you qualify for an enhanced annuity

It’s worth knowing that annuity rates vary significantly between providers—and your current pension scheme might not offer the best deal. That’s why it’s important to shop around (more on that below).

Could You Get a Higher Income Based on Your Health?

Yes—your health and lifestyle could unlock a better rate.

While a conventional annuity assumes you’re in good health, many people qualify for an enhanced annuity, which pays more. Conditions like high blood pressure, diabetes, or even taking certain medications could mean you receive a higher income.

Even lifestyle choices—like smoking or drinking—may increase your annuity payments, because providers factor in life expectancy. In fact, there are over 1,500 qualifying conditions and lifestyle factors.

If you think you might qualify, it’s worth mentioning your full health background when requesting quotes.

Level vs Escalating Annuities: What’s the Difference?

When setting up a lifetime annuity, you’ll need to choose between two types of income:

Level Annuity

• Pays the same income every year.
• Simple and predictable.
• But your income will lose value over time due to inflation.

Escalating Annuity

• Starts lower but increases each year—either by a fixed percentage or in line with inflation (e.g. RPI).
• Helps your income keep pace with rising costs.
• May take years to “catch up” to a level annuity, and not always ideal if you need more money early in retirement.

Choosing between the two comes down to your age, how long you expect to live, and whether you’re more concerned about income today or in the years ahead.

Lifetime Annuity vs Fixed Term Annuity

You may also be considering whether a lifetime annuity or a fixed term annuity suits you best.

Lifetime Annuity

• Pays an income until you die.
• Set it up once, and it can’t be changed.
• Ideal if you want long-term financial certainty.

Fixed Term Annuity

• Pays an income for a set period—usually 5 to 10 years.
• At the end of the term, you’ll receive a guaranteed lump sum (the “maturity amount”).
• Offers flexibility to review your options later—such as moving into drawdown or buying a new annuity.

If you’re unsure what the future holds or want to keep your options open, a fixed term annuity might be worth exploring.

Can I Leave Anything Behind for Loved Ones?

Yes, with the right options in place. A standard annuity stops paying when you die—but you can choose death benefits to provide for a spouse or dependent.

Here are the main options:

Joint Life Annuity

• Continues paying income to your chosen partner or dependent after your death.
• Doesn’t have to be a spouse or civil partner—it could be a financial dependent aged 40+.

Guaranteed Period

• Ensures payments continue for a minimum number of years (e.g. 5 or 10), even if you pass away early.

Value Protection

• Returns a lump sum of the remaining fund (less any income you’ve already received) to your beneficiary.

Bear in mind, adding death benefits may reduce your own income, so it’s important to weigh up the trade-offs.

Do I Have to Buy My Annuity From My Pension Provider?

No—you’re free to shop around, and you should.

The Financial Conduct Authority (FCA) found that up to 80% of people who buy an annuity directly from their pension provider could have secured a better deal elsewhere.

Not all providers deal with the public directly, so you might want to use a regulated annuity broker or specialist. They can compare offers from across the market and help you make the most of your Open Market Option.

How Are Lifetime Annuities Taxed?

Understanding how your lifetime annuity will be taxed is an important part of planning for retirement. The rules can be straightforward once explained properly, but they often raise questions—particularly around the tax-free lump sum, how income is treated, and what happens when you die.

Taking Your 25% Tax-Free Lump Sum

In most cases, when you access your pension pot to buy a lifetime annuity, you can take up to 25% of that pot as a tax-free lump sum. This is often referred to as the pension commencement lump sum.

You don’t have to take this amount, but most people do—either to pay off debts, boost savings, or simply enjoy a bit of flexibility before retirement income begins.

The remaining 75% of your pot is then used to buy the annuity, and this is where income tax comes into play.

Income from Your Annuity Is Taxed as Earnings

Once your lifetime annuity begins paying out, the income you receive will be taxed as regular income. That means it’s subject to Income Tax in the same way as wages or a salary.

Your total income in retirement might include:

• Your annuity income

• Your State Pension

• Any part-time work

• Rental income or savings interest

All of this counts towards your personal allowance (currently £12,570 per year), which is the amount you can earn before you start paying Income Tax. Anything above that allowance will be taxed at your marginal rate (e.g. 20% for basic rate taxpayers, 40% for higher rate, and so on).

Your annuity provider will deduct tax under the PAYE system (Pay As You Earn), just like an employer would. If your income is variable or if you receive income from multiple sources, it’s worth checking your tax code or speaking to HMRC to ensure you’re paying the correct amount.

What Are the Benefits and Drawbacks?

Benefits

• A secure income for life, unaffected by investment performance or market changes.
• Peace of mind—you can budget confidently, knowing your income won’t run out.
• Enhanced income may be available if you qualify based on health or lifestyle.
• You can customise features like death benefits to suit your needs.

Drawbacks

• A level annuity’s value will erode over time due to inflation—unless you opt for escalation.
• Once you set it up, a lifetime annuity is fixed—you can’t change it or cash it in.
• If you don’t include death benefits, payments stop when you die, and your remaining pot doesn’t go to your family.
• You won’t benefit from investment growth, unlike other retirement income products such as drawdown.

Final Thoughts

A conventional lifetime annuity can offer real peace of mind—especially if you value stability and want to avoid the ups and downs of the market.

But it’s not a one-size-fits-all product. Your health, lifestyle, income needs, and plans for the future all play a part in finding the right annuity setup.

Before you commit, it’s worth talking things through with a qualified adviser or annuity specialist. They’ll help you explore the options and ensure you get the best value from the savings you’ve worked so hard for.