Annuity Guide – Introduction

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If you have built up a pension pot, one of the ways you can take money from it is by buying an annuity to get a guaranteed income for life once you’ve retired. An annuity is the only option to guarantee you an income for life.

Deciding which retirement income options to take will be one of your most important financial decisions.


Annuity Overview

You can use your pension pot to buy an insurance policy that gives you a guaranteed income for the rest of your life. This is called an annuity.

  • You get a fixed income for life or for a set number of years.
  • You can take 25% of your pot as tax-free cash and buy an annuity with the other 75%.
  • You pay tax on your annuity income.

If you’re currently receiving a pension income it’s likely that you’ve already bought an annuity or are taking an income from a final salary or career average (defined benefit) pension.

Annuity rules will change in 2017. You may then be able to sell an annuity and use the money to get a lump sum or an adjustable income.

 

How an Annuity is Calculated

How much income you get each year from an annuity depends on things like:

  • how much you had in your pension pot when you bought the annuity
  • your age
  • whether you want the income to increase each year
  • whether you want the annuity to pay out to someone after you die
  • your health and lifestyle

You may have to pay administration fees.

If the insurance company you bought your annuity with goes bust the financial services compensation scheme will cover you in full.

Annuities – shop around and compare providers

Types of Annuity

There are lots of different types of annuity and you can shop around – you don’t have to buy one from your current pension provider.

Type

How it works

Single life

Paid just to you, either for life or for a fixed number of years.

Joint life

Payments continue to your spouse or partner after you die.

Fixed term

Pays an income for a set number of years, then a guaranteed sum which you can invest or use to buy another annuity.

Short term

Stops paying at the end of a set number of years (up to 5 years) or when you die (whichever comes first).

Guaranteed period

Pays out for a set term even if you die within that term, eg you get a 10-year annuity and die after 7 years, your spouse or partner still gets payments for another 3 years or a lump sum.

Enhanced or Impaired

May pay more than a standard annuity if you smoke or have a medical condition, eg diabetes or high blood pressure.

Escalating

The amount increases each year to reduce the effect of inflation.

Level

Pays a flat amount of income each year.

Investment linked

Tied to the stock market, the amount it pays can vary and depends on the success of the investments.

Capital protected

Your pot is paid to whoever you leave it to (your ‘beneficiary’) if you die within a set period, subject to tax.

Once you’ve bought your annuity you only have a short period when you can still change your mind (in most cases 30 days). After that you can’t change the decision.

Annuity Guide Part 2 – Tax and Next Steps