Pension annuity – a guaranteed income in retirement

In this guide: All you need to know about pension annuities, generating a guaranteed income in retirement, the options you have to choose from and what to bear in mind.

What is a pension annuity?

As you approach retirement, it's important to work out how you can create enough pension income to enable you to enjoy the life you want in the years ahead.

Over your working life, you should have built up a pension pot, which you could now convert into a regular income. To do this, you can buy a 'pension annuity' (often simply called an annuity). This will provide you with a guaranteed monthly income in your retirement, so you'll always know you have money coming in each month, no matter what else happens.

How do you get guaranteed income in retirement?

The only way to ensure you receive a set amount of income for the rest of your life is with a pension annuity.

Your chosen annuity simply converts your pension pot, or a part of it, into a guaranteed regular income which can be paid to you for the rest of your life, or if you prefer, for a set number of years. The income you receive from your annuity will be taxed as earnings.

Under current pension rules, you can take up to 25% of your pension pot as tax-free cash, to spend as you wish, when you wish. You then have the choice to buy an annuity – with the rest of your pension pot.

The main benefit of an annuity is peace of mind. Once you've set it up, you have the reassurance of knowing that you will get a guaranteed income throughout your retirement.

However, please be aware that once you have set up an annuity, you can't change your mind or alter it in any way, so you need to be sure it is the right route for you. You should also consider any other pension income options, and whether a combination of products may work best for you.

Try our annuity calculator

Annuities for retirement

Most people choose either a 'lifetime' annuity or a 'fixed-term' annuity to generate an income for their retirement.

Lifetime annuity:

As you might assume, a lifetime annuity provides an income for the rest of your life, no matter how long that might be. You can buy one just for yourself, or on a 'joint-life' basis with your spouse or partner. A joint-life annuity is usually arranged on a ‘last survivor’ basis, so the income will continue until both people named on the policy have died.

With a standard one-person lifetime annuity, when you die, any money left in your pension pot will be kept by the annuity provider – you can't leave it to your beneficiaries in your Will.

Fixed-term annuity:

A fixed-term annuity provides an income for an agreed period of one to forty years (usually at least five or ten years). At the end of this period, you get a lump sum payment – known as a 'maturity value' – which you can use to buy another annuity if you want.

With this kind of annuity, you are not tied to one provider’s specific annuity rate for the rest of your life. Once the term is up you can look at what's available and choose a different annuity from a different insurer, although there’s no guarantee you’ll get the same rate or a better one.

Enhanced annuity:

If you have poor health or a life-limiting condition, you might qualify for better benefits with an enhanced annuity.

When you apply for a standard annuity, the rates are based on average life expectancies in the UK. However, if you have a health condition which could shorten your life span, you can apply for an enhanced annuity based on a shorter life expectancy prediction.

As your annuity is likely to pay out for a shorter period, you will be offered a higher rate and therefore, a greater level of income.

What options are available with annuities?

There are many options available when buying an annuity for retirement, to help you tailor your income to suit your needs. For example:

  • Single or joint life
  • Fixed or increasing income
  • Value protection
  • How and when your income is paid
  • Providing an income for someone after you die

For more information on all the annuity options available visit the Government’s Moneyhelper website or speak to an independent retirement income specialist such as Age Partnership. They can talk you through all your options in plain English, at no cost to you and with no obligation to go any further, if you decide not to.

How much guaranteed income might I get?

How much guaranteed income you can get will depend on your personal situation i.e.:

  • Your age – you can buy an annuity from the age of 55 onwards
  • Your state of health and your lifestyle – unlike life insurance that penalises you for being in ill health, with an annuity poor health could enhance your income by up to 50%.
  • How much money you have in your pension pot – in simple terms, the more pension money you use to buy your annuity, the higher your annuity income will be.
  • Annuity rates – the amount of income will be affected by interest rates at the time and the options you choose.
  • Any options you choose – it’s worth considering the value of each option to you against the impact it may have on the income you may get.

You could get more pension income with Age Partnership

When you choose the Age Partnership Pension Advice Service they will look closely at a wide range of providers from across the market to find you the get the best pension income comparing Aviva, Standard Life, LV, Prudential, Canada Life, Hodge Lifetime and others.

Age Partnership are so confident of offering you the best pension income deals that they will give you £100 if you find a better like-for-like annuity quote.

Calculate your pension income now

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