Pension paths
Clarity today means calm tomorrow.
Planning for retirement isn’t just about saving, it’s about making those savings work for you. An annuity can provide guaranteed income for life, and with the right choices, that income can be higher than you think.
Shopping around matters, as different providers offer different rates that could boost your annual income by hundreds of pounds.
What is an annuity?
An annuity is a product that pays a guaranteed income – usually monthly – for as long as you live. You can buy one with some or all of your pension pot, or with your savings.
There are five different kinds of annuities. Choosing the right one for you depends on where the money is coming from and what you need it to do.
1
Pension annuity
A lifetime income you can buy with money from pension pots. You choose from a range of options to suit your needs. And your choices will affect the amount of income you receive.
2
Immediate life annuity
These are similar to pension annuities, but you buy them with money from savings.
3
Immediate needs annuity
You can buy this annuity to help cover the costs of care. They have similar features to other annuity products.
4
Fixed term annuity
You buy it using pension money to provide a guaranteed income for a fixed amount of time, and you could get a lump sum back at the end. This depends on how much your annuity costs, and how long you have received payments from it.
5
Enhanced annuity
You might get more money from your annuity if you have certain medical conditions or a lifestyle that could affect your life expectancy.
The annuity features
Types of payment
Tax-free cash lump sum
You can take up to 25% of your pension as cash without paying tax. Your money is paid directly into your bank account, so it doesn’t count towards your annuity.
Payment frequency
Most annuity products offer monthly, quarterly, half-yearly or yearly payments. You’ll also need to decide if you want your payments to start as soon as your annuity is set up (in advance) or if you want your first payment at the end of your chosen frequency (in arrears).
Level annuity
This is sometimes called a flat rate annuity. You will get the same amount of money every time you are paid until you die.
Escalating annuity
Your annuity payments will increase each year either by a fixed percentage or in line with the Retail Price Index. You can choose which one suits you best.
Death benefits
Guarantee period
Your payments continue to your estate for a fixed time after you die. The guarantee period starts when your policy is set up. So, if you choose a five-year guarantee, and die two years into the policy, your annuity payments would carry on to your estate until the five years are up.
Value protection
You can protect the amount you bought the annuity for, and a lump sum can be paid to your beneficiary or to your estate when you die. The lump sum is equal to the amount you bought the annuity for minus the payments made to you while you were alive.
Joint life annuity
You can choose to pass your annuity payments on to your partner or dependant after you die. You will need to decide how much of the money they receive, which can be up to 100%. If you chose 100% for example, you will still be paid until you die, and then your partner will receive the same level of payments for the rest of their life too.
Know your options
Annuity
Annuity provides a guaranteed income for life in exchange for your pension pot. You purchase an annuity from an insurance company, and they pay you a fixed amount regularly until you die.
Drawdown
Drawdown allows you to keep your pension invested while taking flexible withdrawals. You can adjust how much you take and when. However, your pot value can fluctuate with market performance, and you risk running out of money if you withdraw too much or live longer than expected.
Cash lump sum
You can take your entire pension as cash, though only 25% is tax-free, and the remainder is taxed as income.
Mixed approach
Many retirees combine these options – perhaps taking some cash for immediate needs, purchasing an annuity for essential expenses, and keeping the remainder in drawdown for flexibility. This approach helps balance security, flexibility, and the potential for growth. It can also help manage some of the risks that come with retirement planning.
The best choice depends on your financial situation, risk tolerance, health, and whether you want to leave an inheritance. Speak with an advisor to find the balance that brings you peace of mind.
Annuity myths, unpacked
There’s a lot of noise out there about annuities. Let’s clear the air.
Myth 01
“Annuities are poor value because the insurance company will keep my money when I pass”
You can protect the amount you bought the annuity for, and a lump sum can be paid to your beneficiary or to your estate when you pass.
Myth 02
“Annuities are not flexible, if you don’t know what your needs are”
You can buy a fixed-term annuity, which will provide a guaranteed income for a fixed amount of time, and you could get a lump sum back at the end.
Myth 03
“Annuity rates are not very good”
Annuity rates are at a 16-year high, and you might get more money from your annuity if you have certain medical conditions or a lifestyle that could affect your life expectancy.
Myth 04
“You can only buy an annuity from your pension provider”
You can shop around for the best rate from all the annuity providers in the market on a comparison site similar to car or house insurance, or through a financial adviser.
FAQs
What is the best age to buy an annuity?
You can buy a pension annuity from the age of 55. Higher annuity rates are generally offered to older people. In addition, the earlier you buy one, the longer you’ll need to rely on it. So, if you buy one at 55, you’ll need to pay more into it to receive the same level of income per year as you would have had you bought it at 65. It’s about making a balanced and informed decision.
Can you buy an annuity without a pension?
Yes, they are called Immediate Life Annuities, they are like pension annuities, but they are funded with savings.
How long does an annuity last?
Pension annuities provide a guaranteed income for life, and you even have the option to pay a lump sum to your beneficiary or your estate when you die.
What to look for when choosing an Annuity provider?
Comparison is key. If guidance helps, seek professional advice—to ensure serenity in your outcome.
Do you pay tax on annuity income?
Pension annuity income payments are treated as income and may be subject to income tax depending on your total retirement income and personal allowance.
Are annuities safe if the market crashes?
Yes, annuities provide a guaranteed income regardless of what is going on in the stock market.
What are the pros and cons of an annuity?
Pros:
Choice and Personalisation: When you buy an annuity, you can tailor your annuity income to your personal circumstances.
Guaranteed income: Provides predictable, steady payments for life or a specified period, offering financial security in retirement.
Longevity insurance: Protects against outliving your savings with a lifetime income.
Cons:
Potential lack of flexibility: Once you buy an annuity, the terms are fixed. You can’t change it later, even if your circumstances change. Although you can use a fixed-term annuity if you are unsure.
Tax considerations: Pension annuity income payments are treated as income and may be subject to income tax depending on your total retirement income and personal allowance.
Potential value: Payments will stop upon your death unless you’ve chosen options like a guarantee period, joint lifetime annuities, or value protection.
Pause. Breathe. Explore with ease.
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