What is a Standard or Level Annuity?

This is the most popular kind of annuity sold in the UK, making up 90% of all annuity sales. Sometimes referred to as a level annuity, a standard annuity will pay you an equal amount each year throughout your retirement, regardless of how long that it is. These types of annuity are popular as they ensure you will never outlive your income, e.g you will never stop receiving an income from your pension pot. If you have a long retirement you may indeed receive more than the total amount invested when you bought your annuity, in which case you will have ‘made money’ on your investment.  A level annuity provides a stable and secure income in retirement and allows people to plan their lives safe in the knowledge that they know exactly how much income they will have to live on each month.

If you have a small or moderate pension fund and do not qualify for an enhanced annuity, a level annuity maybe the best option when at retirement. If however you have any health conditions that qualify you for enhancements, then you would be better suited buying an enhanced annuity as this will offer a higher rate. Although two thirds of annuitants do qualify for these better rates, only a small minority end up buying one due to a lack of use of the open market option.

Inflation

One of the main disadvantages of a level annuity is that it does not mitigate against the problem of inflation. As you will be receiving the same amount of income for the rest of your life your actual spending power in real terms is being eroded year by year by inflation. If inflation remains high for a prolonged period then this can really make a dent in your pocket. For this reason many retirees opt for escalating annuities, which can take many forms including inflation-linked or RPI annuities.  Choosing an escalating annuity does however mean that your starting income is lower, which is why most retirees go for a standard annuity as this offers the highest monthly amount.