What is an annuity pension?
An annuity is a guaranteed retirement income that's normally paid for the rest of your life or a guaranteed period. You can buy an annuity once you reach 55 years of age, or earlier if you have a protected pension age under certain schemes. It's important to seek pension guidance to ensure you choose the best retirement option for your circumstances.
Key facts
Annuities work by providing guaranteed monthly or yearly payments and will pay either a fixed or increasing income for the rest of the owner's life - known as a lifetime annuity - or for a set number of years, known as a fixed-term annuity. You will receive regular income, even if your circumstances change.
Once set up, an annuity can't be changed, so it's important to ensure that it's structured correctly. Many annuities are protected by the Financial Services Compensation Scheme, guaranteeing income even if your state pension provider goes under.
Annuities can provide a secure income that never changes or a pension income that goes up each year by an agreed amount.
The amount of annuity income you receive is based on a number of factors, including the amount of money, your provider, the applicant's age and health and any features selected.
You can cash in up to 25% of your pension fund as a lump sum of tax-free cash and use the rest to buy an annuity. If you take out more, you must pay income tax.
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What is an annuity?
What is an annuity?
An annuity is guaranteed income and a financial contract between you and an insurance company. Here's how it works:
1. You make a lump-sum payment (i.e. your pension pot) to an insurance company.
2. In return, you receive guaranteed regular income. These payments can begin immediately or at a specified future date.
There are different annuity options, each with its own features:
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Lifetime annuities: also called a standard annuity. These provide a retirement income for the rest of your life.
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Level annuities: pays the same income each year, but will not adjust for inflation.
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Inflation-linked annuities: also called an escalating annuity. The annuity rate increases each year to protect against inflation.
- Enhanced annuities: pay higher income based on poor health or lifestyle factors like smoking.
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Joint Life Annuities: continue to pay an income to your spouse or partner after your death.
Remember that annuity contracts vary depending on your pension provider, annuity provider, and other factors, so it's essential to consider your specific circumstances and talk to a financial adviser when making decisions about annuities.
Watch our short video on annuities to find out more.
The good things about annuities
Choice and personalisation
You can tailor your annuity income to your personal circumstances. There are lots of choices for tailoring your income, such as:
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Yearly increases, at either a fixed rate or in line with inflation and the retail price index
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A pension for someone close to you if you die before them
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A guarantee that the income will continue for a certain time, even if you die during that time, and
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Value protection, where you protect part or all of your pension savings as an amount to be paid to your beneficiaries - then, after you die, your annuity provider takes off the income you've received and, if there's any money left, pays it to your beneficiaries.
Annuity rates are determined by many factors, including your health. If you have any health issues that could shorten your life, your medical information could potentially get you a higher income with an enhanced annuity.
How much income you receive from your pension annuity depends on several factors, including your pension plan. Be aware that the more annuity benefits and features you add, the lower the starting income will be.
Simplicity
Once the annuity is set up there's nothing else to do - you can just sit back and spend the money.
Not-so-good things about annuities
Lack of flexibility
Once you buy an annuity, it can't be changed, so it's important to get it right in the first place.
The income can stop when you die
Depending on what kind of pension annuity you choose, the income can stop completely when you die, with nothing left over. You can choose to buy an annuity that pays a pension to someone close to you, but that will stop when they die. Or you can choose value protection, where you protect part or all of your pension savings as an amount to be paid to your beneficiaries when you die – so they get the remaining funds, less the pension payments you'd already received.
Potential lack of value
The amount of yearly regular income you'll get from an annuity can look low compared to the amount in your pension pot. But remember: the income is paid for the rest of your life (or a fixed term). If you multiply your annuity by an estimate of the number of years you expect to live beyond your retirement age, it could look quite different.
Don't be stressed about your pension options. Get expert pension advice and easily take control of your retirement, today.
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