Annuity fees and charges: what do they cost in the UK?

Annuity fees in the UK: advice on an annuity is paid by fee, not commission, and the pension you are leaving may charge an exit or withdrawal fee.

This page sets out what the official sources say about the costs of turning a pot into a lifetime or fixed-term annuity. For how an annuity works, see what a pension annuity is.

Free, impartial guidance is available first: MoneyHelper, which says it is backed by government, says a free and impartial Pension Wise appointment can help explain your pension options (see what Pension Wise is). If your own pots and tax need looking at, the enquiry form on this page will pass you to an FCA-authorised adviser firm. Nothing here is advice.

What does it cost to buy an annuity?

MoneyHelper says the income an annuity pays depends on the rate a provider offers; that rate is set with your age, your health, where you plan to live, current interest rates and other market factors in view. GOV.UK adds that you can ask your pension provider to pay for an annuity out of your pension pot.

So the practical cost of an annuity is the income you are offered for your pot, which differs between providers. What a pot might buy is covered in how much annuity income a pot gives, and how rates have moved in UK annuity rates through history.

The costs you can identify are the ones around the purchase, covered below: paying for advice or a broker, any charge on the pension you are leaving, and the cost of not comparing.

Adviser and broker charges

MoneyHelper says you can compare annuities with its free tool, or use an annuity broker or pay a regulated adviser to suggest a provider and product. In some cases you might need a broker or adviser to access a product. Advice is a paid service: "Consider paying for regulated financial advice to make sure an annuity is the right option for you."

How an adviser charges varies. The cost and the way you are charged can vary, so it helps to collect quotes from several advisers or firms; the options include an hourly rate, a fixed fee for a one-off review or plan, and a fee based on the value of your pension or investments. Ask each for its charge in pounds.

MoneyHelper says the cost of advice must be made clear before you commit, along with how the adviser’s charges work and whether there are any ongoing costs, such as fees for managing your pension or investments over the longer term. It also suggests asking whether the adviser is independent or restricted, and says it receives no incentive or commission for its own comparison tool.

If advice goes wrong there is a route: "If you pay for regulated financial advice and it turns out to be poor, including if you lose money as a result of bad advice, you can complain and ask for compensation."

Commission and what advisers must disclose

Commission is a payment from a product provider to an adviser or broker. For annuity advice it is ruled out: MoneyHelper’s guide to adviser fees says advisers cannot be paid a commission for advice about retirement income products such as annuities. "Instead they must charge you a fee for the advice." That statement is about advice. If a broker arranges an annuity without recommending one, ask how it is paid: by you, by the provider, or both.

The FCA's rules behind this are in COBS 6.1A, which covers personal recommendations on retail investment products. The Handbook glossary's definition of those starts with a life policy, which takes in long-term insurance contracts, a class that includes life and annuity. An advising firm must "only be remunerated for the personal recommendation (and any other related services provided by the firm ) by adviser charges" (COBS 6.1A.4R), and must agree the total adviser charge with the client and disclose it in cash terms (COBS 6.1A.24R). Free annuity advice sets out what costs nothing.

Whether a fee for advice is worth paying depends on the size of your pot, your health and your other income. To put that question to an FCA-authorised adviser, and hear the fee in pounds first, use the form on this page: it sends your details to one adviser firm and takes a minute or two.

Charges on the pension you are buying it from

Before you buy, check the pension you are cashing in. MoneyHelper lists what an existing provider may charge, including a fee for moving your money to a new scheme (an exit or transfer fee) and a fee for taking money from your pension when you retire. GOV.UK says your pension provider might charge you for withdrawing cash from your pot, so check with them.

Ask your current provider about its product options and fees, and whether there would be a penalty, such as an exit fee, for transferring to a different provider. Providers of personal and stakeholder pensions must also warn you where relevant: the one-page summary the FCA requires them to send must include "a statement warning the retail client that the current value of their pension savings may be subject to early exit charges or other withdrawal charges when accessed" (COBS 19.4.6CR(6)).

The FCA limits one kind of charge, on personal and stakeholder pensions only: the early exit charge, which its glossary defines as a charge on a member who, having reached normal minimum pension age, takes, converts or transfers benefits before the scheme’s expected retirement date. Plans entered into on or after 31 March 2017 may not carry one (COBS 19.6A.4R); on earlier plans it may not exceed the lower of 1% of the value of the benefits being taken, converted or transferred, or any lower charge the plan's terms provided for on 31 March 2017, and no charge at all if they provided for none (COBS 19.6A.5R). Workplace (occupational) money purchase schemes have their own cap, in regulations 13A to 13C of SI 2015/879, which pension transfer fees explains; pension charges covers the other fees, and for any charge outside those rules, ask the provider. Moving a pension is covered in how to transfer a pension.

Also check for a guaranteed annuity rate before leaving: MoneyHelper says a guarantee like that may give you more guaranteed income than you would find elsewhere. That is a cost of moving that does not show up as a charge.

The open market option: shopping around

Buying from an insurer other than your pension provider is called using the open market option, and the FCA’s rules for pension providers (COBS 19.4) are written to push you towards comparing. How to compare annuity rates covers those rules and how to compare quotes like for like. The cost of not comparing is real: MoneyHelper says comparing might mean you find a different provider that will pay you a higher retirement income, and that an adviser might reach better rates than you can get directly. "Might" is the word to hold on to, and an advice fee has to be set against any gain. Health can change the offer, as enhanced annuity rates explains.

To compare like with like, ask each provider for quotes with the same pot, income type and protections.

The comparison has to come first. Once the 30-day cooling-off period (which MoneyHelper says most annuities carry) is over, there is no cancelling, so the price you accept is hard to change later; see whether you can withdraw from an annuity and annuity transfer rules.

Annuity fees: questions people ask

Do annuities have fees?

The charges to look for are around the purchase: an adviser's fee (or a broker's, if it charges one), and any exit or withdrawal charge on the pension you are leaving. Ask each provider and adviser to confirm all charges in writing.

Do annuity advisers take commission?

Not for advice: MoneyHelper says advisers cannot be paid commission for advising on annuities and charge a fee instead, which they must tell you before you commit. A broker that arranges an annuity without a recommendation is a different case, so ask how it is paid.

How much does an annuity cost?

The pot you use is the price, and the income is what you are offered for it. The rate offered turns on who you are and what markets are doing: your age, health and intended home area, plus interest rates. For the maths of rate against pot, see annuity income.

What is the average fee for an annuity?

It depends on who you pay. Advisers may charge by the hour, a fixed fee or a share of the pot, according to MoneyHelper, so compare written quotes.

Is there an annuity cost estimator?

MoneyHelper says its free and impartial annuity calculator compares rates from all providers, with the caveat above that some products need a broker or adviser. It shows the income on offer, not adviser charges; for where rates are heading, see are annuity rates going up.

Do extra features cost more?

Each protection you add will usually cut the income, so the cost shows in the income. The features, such as income for a partner, are in the pension annuity guide, and the wider choice in is an annuity worth it.

Your next step

Pension Wise is free, and MoneyHelper says you can usually ask your own provider for quotes; its charges and exit terms are worth having in writing too. Should you want an FCA-authorised adviser to weigh your circumstances, reach one by completing the form on this page; ask what they charge before you commit.