What is a pension annuity?
A pension annuity is a way of taking your pension that guarantees you a fixed income for the rest of your life. It is sometimes called a ‘secure income’ and is a product that is bought using your pension savings.
Annuities are free from investment risks and have no ongoing charges, but they are locked in once you take one. This means that you can’t change your income or switch to another provider.
The amount you receive depends on how much money you’ve saved as well as your age and health when you retire. It can also depend on how many extra features you add to it.
If you have decided an annuity is right for you, depending on your circumstances, you may be able to get a better deal from some providers compared to others. This is why it's always best to shop around before deciding which provider to take your annuity with.
Video transcript
At the moment, from age 55, you can turn your pension savings into a regular income that’ll keep going for as long as you do. This is also called ‘buying an annuity’. This is increasing to age 57 from the 6th of April 2028.
You give some or all of your pension savings to an insurance company and, in return, they'll pay you a guaranteed, regular income every year for the rest of your life. You can also combine taking a secure income with your other retirement options.
You can choose to add extra features such as yearly increases to your money or making sure your loved ones will get some of your income when you die. It costs more to add on certain features, so your starting level of income will be less.
Before buying a secure income, you can usually take up to 25% of your pension savings as a tax-free lump sum.
Things to watch out for:
With this option you need to get things right the first time.
That's because once things are up and running, you won't be able to add extra features or change your mind – even if your circumstances do.
If you'd like to pass anything onto your loved ones, you'll need to make sure it's been agreed up front otherwise your income will usually stop when you die.
Before buying a secure income, you should shop around to find the best deal, it might just give you more money in your pocket.
To find out more about your retirement options, talk to your financial adviser, or visit royallondon.com/retirement
What are the different types of annuities?
There are many different types of annuities, so although they can’t be changed once bought, there are plenty to choose from. The most common types of annuities are:
- Lifetime annuities - these pay you a guaranteed income until you die.
- Joint-life annuities - these will continue to pay a nominated person even after you die.
- Enhanced annuities - An enhanced annuity takes your health and lifestyle into account when working out the income you’ll receive. This is because people with shorter life expectancies don’t need to make their savings last as long. You may qualify for an enhanced annuity if you:
- have a long-term illness
- have a serious medical condition
- smoke
- are overweight.
For more information on the different types of annuity, take a look at our pension annuity guide.
-
You cannot change your annuity after you buy it
Unlike other retirement options, you cannot make changes to an annuity once you’ve bought one.
-
Adding extra features will lower your income
If you want to add any extra features, such as making sure your loved ones will get some of your income when you die, you should expect to be paid a smaller income.
-
Your income is taxable
Any money you receive over your personal allowance will be taxable and could also affect your entitlement to means-tested state benefits.
-
Limit on tax-free cash
You can usually take up to a quarter of your pensions savings as a tax-free lump sum. If you want to take tax-free cash, this has to be taken before you buy a secure income. Tax rules depend on your individual circumstances and may change in the future.
-
You may get back less than you pay in
Depending on the features you choose and how long you live, there is no guarantee that you’ll receive as much money as you paid in.