One of the options when it comes to what you do with your pension savings is to buy an annuity. There are a number of different types but they all pay a guaranteed, monthly, quarterly or annual sum until you die or for a fixed amount of time.
You can normally take 25% of your fund as a tax free cash lump sum and use the rest to buy a guaranteed income for life (an annuity which will be subject to tax).
You can choose an annuity that reflects your personal circumstances but the choices you make will affect the level of the regular income you’ll receive. For example, opting for an annuity that increases over time will mean that the income starts at a lower level than an annuity that remains level; choosing to provide for a spouse or dependant in the event of your death, or to have the annuity paid for a guarantee period after your death, will both reduce the level of ongoing regular income compared to an annuity without these features.
In addition your age and where you live will have an impact on the income you receive.
If you have certain health conditions or have made particular lifestyle choices which may lower your life expectancy, you might get up to 50% more income by taking an enhanced annuity in comparison to a standard annuity.
Visit our calculators and tools to work out what regular income you might get.
George wants a regular income for the rest of his life. He also wants to know exactly what he’s getting and when. When the time comes for him to retire, he plans on taking his 25% tax-free allowance in one lump sum, using what’s left to buy an annuity.
Lifetime annuities provide you with a regular income for as long as you live. Your initial level of income will be based on some of the following factors. Please be aware that this list is not exhaustive.
With a standard annuity the annuity rates, and therefore the income you get, are based on the normal life expectancy of people of the same age as you.
With an enhanced or impaired life annuity, if you have a qualifying medical condition or lifestyle factor that may lower your life expectancy, you could get payments as much as 50%* higher than you might get from a standard annuity. Factors such as your age will also affect how much you get from an enhanced or impaired life annuity.
*Source – Which? website, March 2017
Whatever type of lifetime annuity you qualify for you then have options about how the annuity is set up. These include:
You can choose for the income you receive to remain the same throughout your lifetime. Although this might provide a higher starting income it does mean that the value of your income will be worth less in real terms over time due to the effects of inflation. You can instead choose for your income to increase each year, either at a set percentage varying in line with inflation. This helps to reduce the effects of inflation and maintain your buying power. However it does mean that your starting income will be lower than if you chose a level annuity. It can prove good value if you live a long time.
A Lifetime annuity provides you with a regular income for as long as you live. However, you can choose for your income to be paid for a guaranteed period of time – say for 10 years. This means that, even if you die during this period, the income will continue to be paid out until the end of the guaranteed period. If you live longer than the guaranteed period you have chosen, your income will continue to be paid for the rest of your life. This option is usually inexpensive and although it will reduce your income it shouldn’t be significantly lower.
You can choose to include an income for your spouse, civil partner or other dependant when you die. The amount they get is likely to be an agreed percentage of your annuity income. Choosing this option will reduce the income that you get and the higher the percentage you pass on, the lower your annuity income will be.
There are also other types of annuities available, such as:
This type of annuity, gives you an income for an agreed amount of time, usually between 3 and 20 years. It may also pay a specified ‘maturity amount’ when it ends which can be re-invested in another retirement plan.
Investment-linked annuities invest in a range of investments, which means the value of your fund and the income you receive from it can go down as well as up. They do not provide a guaranteed level of income for life – the amount you will receive will change depending on the performance of the underlying investments.
Once set up, you can’t cash in your annuity or change the basis of your income, even if your circumstances change.
Annuity payments typically end when you die. So unless you’ve made other provision, are still within any guaranteed period or have a joint or fixed-term annuity there’ll be nothing to leave a partner or dependant.
If you’ve paid enough National Insurance contributions (NICs) you’ll get a State Pension. Depending on circumstances you may also be eligible for a number of other State benefits.
Many people have an idea of the income they will need to live comfortably in retirement. If your pension pot won't provide that much, there are a number of things you could consider to boost your income or help it go further.
Keep your pension invested by postponing your retirement, and you may be able to increase your annuity income. You could also defer the payment of your State Pension, which will increase every year you put off claiming it.
From 1 March 2018, if you ask us for an annuity quote, we will also let you know the best available annuity from all pension providers. All you have to do is give us your consent to share your details with other pension providers, and you can see whether you might be able to get a higher income elsewhere. We also think it’s a good idea that you shop around before you make your decision, to help you get the best outcome. Why not visit the Money Advice Service for advice, tips and tools to help you make an informed decision. It’s an independent site set up by the Government to help you make the most of your money by giving you free, impartial advice.
Go back to the taking your money home page to look at a different stage.
Have you thought about what your plans mean for your retirement income? Our calculators can help you work it out.
Got more than one pension? Then you could think about putting them all in one place. Combining your pensions with Scottish Widows is simple and we won't charge you for this service.