You can receive a guaranteed income for life by buying an annuity with your pension savings. These are relatively straightforward to manage.
How an annuity works
- An annuity takes your pension savings and guarantees a regular income in retirement for a guaranteed period. This would guarantee the annuity would continue in the event of your death during that period. If you live longer than the guaranteed period, the annuity would continue to be paid until your death.
- How much you receive is dependent on a range of factors, such as age, postcode, current health and lifestyle.
- Annuities are taxed as income.
- An annuity doesn’t let you withdraw a lump sum once it’s set up, but you can choose to take up to 25% of your savings as tax-free cash before you set up the annuity.
- If you do add a death benefit or other extra features such as increasing income, your annuity may start with an initial reduced income.
Types of annuities
Annuities can be set up in different ways to meet your needs. If you add extra features, you may receive a reduced income. Here are some typical annuity options:
Single or joint life
A single life annuity pays an income for your life only. If you have a partner or dependant who will need an income if you die first, consider a joint life annuity. A joint life annuity can be paid to a named spouse or civil partner, an un-named spouse or civil partner, or a named financial dependent.
Level or escalating
A level annuity pays a fixed amount which doesn’t change. An escalating annuity starts lower and increases over time. Typically, it increases in line with either the Retail Prices Index (RPI), Consumer Prices Index (CPI), or at a fixed rate.
Enhanced or impaired-life annuities
Some providers offer enhanced or impaired life annuities. These pay a higher income than standard annuities based on certain health and lifestyle factors. It may provide a higher retirement income if, for example, you smoke regularly or have health problems which threaten to reduce your lifespan.
Annuities with a guarantee period
These annuities guarantee payments for a fixed period, even if you die before the period ends. For example, if you had a 10-year guarantee period but died after four years, income payments would continue to your dependents for a further six years. If you were to survive the guaranteed period, the annuity would continue until your death.
Considerations if considering taking an annuity
- Once your annuity is set up, you can’t change it. So, it’s important to think carefully about your needs and what the most suitable option is before committing.
- Annuity rates can change substantially and rapidly. There’s no guarantee that when you come to buy an annuity, that the rates will be favourable. This could mean your pension value and payments are less than you’d hoped for.
- If you’re not sure what sort of annuity you should get or whether it suits your need, consider talking to a financial adviser. There may be a cost for this.
It’s possible to blend several withdrawal options to give you the exact amount of security and flexibility you need in retirement.
The options you can choose from include:
- Flexi-access drawdown
- Small pot lump sums
- Uncrystallised Funds Pension Lump Sum (UFPLS)
Uncrystallised Funds Pension Lump Sum is withdrawal of funds directly from your pension pot, provided you haven't accessed the pot in any other way, such as setting up drawdown, buying an annuity, or taking a tax-free lump sum of 25% of the pot.
- When you take a UFPLS from your pension, 25% is paid tax free and the remainder is taxed as ordinary income.
- If you choose a combination of options, remember that the considerations for each individual option will still apply. For example, any income from a flexi-access drawdown isn’t guaranteed, and annuity rates can change substantially and rapidly.
Which option could be right for you?
It’s up to you how you take your pension and it will depend on your individual circumstances. If you’re unsure, there are impartial resources available to help you feel more informed.