Securing a guaranteed income
If having a guaranteed income for life free of investment risk is what you’d like, then a pension annuity could be for you.
You exchange some or all of your pension savings for a type of insurance policy, called a pension annuity, which provides a regular income. Currently annuities are the only way to provide a guaranteed income in retirement that lasts as long as you do.
With any big purchase it is important to understand your options and shop around for the best deal. Pension annuities are no different. There are different types of annuities and a number of options enabling you to tailor an annuity to meet your personal needs.
Some annuity providers offer ‘enhanced’ annuities. These take your health and lifestyle into account when determining the income you will receive. These can arise from fairly common factors like:
- having high cholesterol, or
- being overweight,
up to more serious or life-threatening conditions such as:
- cancers, and
- heart disease.
Your income will not go down as a result of medical information you give. You may be able to increase the income available to you if your health position is taken into account and you qualify for an ‘enhanced’ annuity. You should check that this information is being taken into account when obtaining quotes for your annuity.
Use our free online annuity comparison service to do some of the legwork for you.
We offer lifetime annuities from a wide panel of annuity providers. These providers are Aviva, Canada Life, Hodge Lifetime, Just, Legal & General, Retirement Advantage and Scottish Widows. We offer enhanced annuities that will take your health into account when offering an annuity.
|Annuity advantages||Annuity disadvantages|
Provides a fixed income for life no matter how long you live.
Buying a pension annuity is currently a ‘one-off’ decision that cannot be changed. So you need to be sure about the choices you make (including the features of your annuity) before you commit.
No investment risk.
No opportunity to benefit from investment growth.
You can choose to guard against inflation.
Adding features to your annuity can reduce the amount of income it provides, and once your payments have started these features cannot be added or changed at a later date.
If you wish to do so, you can ensure your loved ones are provided for after your death.
Poor health, lifestyle and where you live can generate more income.
Find out more...
Why should I consider a pension annuity? +
The real value behind this retirement product is that it gives you peace of mind by providing you with a guaranteed, regular income stream that you can rely on for the rest of your life. You can plan for future with certainty. Depending on the amount of savings you have and how much you think you will need in retirement, you could use a portion of your pension pot to buy an annuity. That gives you the freedom to use one or some of the other options with the rest of your pension savings.
When deciding how to convert your pension savings into retirement income, consider the following questions:
- Can you afford to take any risks with the funds you saved for retirement?
- If you don’t have a guaranteed income you can rely on, how will you pay your bills in retirement?
- Could you cope with ‘losing’ money if your investment returns went down instead of up?
Find out how much guaranteed income you could generate from your pension pot with our online annuity comparison service.
Can I take an additional cash lump sum with an annuity? +
Yes, provided you take the additional lump sum before you buy your pension annuity. You cannot take a lump sum once you have purchased an annuity.
Find out how much guaranteed income you could generate from your remaining pension savings with our online annuity comparison service.
Different types of annuity +
- A conventional pension annuity provides a predictable, secure retirement income guaranteed to be paid for the rest of your life, regardless of the performance of financial markets.
- An enhanced pension annuity or individually underwritten annuity also provides an income guaranteed to be paid for the rest of your life and comes with the same range of options to protect and guarantee your income as a conventional annuity. The only difference is that they take factors such as your health, lifestyle and where you live into account when determining the income you will receive.
- An investment-linked annuity takes your pension fund and converts it into an income. Unlike a conventional annuity, the amount paid can vary as there is potential to receive more or less income, depending on how investment funds perform (though there is usually a minimum income that it can't fall below)
- A fixed term annuity pays a guaranteed income for a fixed number of years. At the end of the period you will need to decide what to do with the remainder of your pension pot, which could include taking a lump sum payment or using the remaining pot to purchase a further income.
We only offer conventional and enhanced annuities. Our online annuity comparison service compares conventional and enhanced pension annuity quotes from a panel of annuity providers in the market. These providers are Aviva, Canada Life, Hodge Lifetime, Just, Legal & General, Retirement Advantage and Scottish Widows.
How can I guard against inflation? +
Inflation can reduce the real value of your income over time so when you’re shopping around or setting up your annuity, it’s worth considering an option to increase your income over time.
Some important points to consider:
- Most annuities offer options to automatically increase your annuity income each year by a set percentage or by linking to a measure of inflation such as the Retail Prices Index.
- Think carefully about the pros and cons of protecting your annuity against inflation.
- In times of deflation, some index linked annuities can decrease, while others have built in 'floors' meaning your income will never fall.
- Adding in any one of these options will reduce your initial income as your income will increase in the future.
Use our online annuity comparison service to see the potential financial impact of each option, so you can weigh up what suits you best.
How do I provide for loved ones? +
A lifetime annuity pays you a regular income for the rest of your life but once you die your payments will stop. You can choose to add options when you set up your annuity to ensure a loved one continues to benefit from an income from your annuity after you have passed away.
The following are the main options you can choose to add to your annuity:
- Joint annuity - pays some or all of the income you were receiving to a spouse, civil partner or someone financially dependent if you die before them.
- Guarantee period - this ensures the annuity will continue to pay out for a set period from 0 to 30 years, regardless of whether you die earlier.
- Value protection - this option provides a lump sum to your estate when you die. The amount is any difference between the amount of the pension fund that you choose to protect and the gross income already paid to you as an annuity income, less any tax payable.
As each option comes at a cost, use our online annuity comparison service to see the potential financial impact of each option, so you can weigh up what suits you best. It's worth considering any other financial products you may have that could provide similar benefits - for example life assurance policies.
How does a joint annuity protect a loved one?
This allows the annuity income to switch to another person eg. a spouse, dependant or civil partner, should you die before them. When you die the annuity income switches to pay that person, and pays them an income in the same way, for the rest of their life. Should that person die before you, your income continues, but when you die nothing will be passed on, the income will just stop (if no other options are chosen).
Remember to include your loved one’s medical details as well as your own to get the best possible retirement income quotation.
Including this option will reduce the amount of income you receive - use our online annuity comparison service to see how different scenarios could affect your income in retirement. It is worth considering any provisions you/your dependant may have already such as pension or life assurance policies, and choosing the options that suit your situation.
The diagram below shows you how this option works:
How does the guarantee period work?
If you were to die soon after starting your annuity, your annuity would ordinarily stop and there would be no further payments made.
You can choose to add in a 'Guarantee Period’, which will ensure that your income will continue to be paid until the end of the Guarantee Period, regardless of whether you die earlier.
Points to consider:
- You can choose how many years you wish the guarantee to last, from the outset of your policy.
- The longer the guarantee the less your initial income will be.
- You can nominate anyone to receive the income from your guarantee either directly to the annuity provider or through your will.
- If you live past the guarantee period your income continues but when you die nothing will be passed on, the income will just stop (if no other options are chosen).
Including this option will reduce the amount of income you receive - use our online annuity comparison service to see how different scenarios could affect your income in retirement.
The diagram below shows you how this option works.
What is value protection and how does it work?
Value protection (sometimes known as annuity protection) is an option that returns a lump sum to your beneficiaries if you were to die without having received the full value of your pension fund.
When you take out your annuity, you can choose to protect a percentage of your pension fund, right up to 100%.
The lump sum that will be payable on death will be the percentage of the pension fund that you have protected less the total gross income already paid to you as an annuity income.
The lump sum will be paid tax-free if you die before age 75. If you die after age 75 the lump sum will be taxable at your beneficiary’s marginal tax rate if paid after that date.
Please be aware that some providers limit value protection so that it is only payable if you die within a certain time, such as before your 75th birthday.
Understand how value protection affects the income your annuity pays with our online annuity comparison service.
How is annuity income calculated +
The amount you receive from the annuity provider will depend on a combination of the following:
- The amount you have saved into your pension
- Your age
- Whether you choose to take any tax-free cash (pension commencement lump sum) and how much this is
- The options you choose, such as linking the income to inflation or providing an income for your partner should you die
- Other factors such as your health and lifestyle
- Economic circumstances – generally when interest rates are lower you get a lower income, and when they are higher you get more
Compare pension annuity quotes to see how much guaranteed income you can receive from an annuity with our online annuity comparison service.
Will I qualify for an enhanced pension annuity? +
A broad range of medical condition and lifestyle factors, including where you live, can qualify for an enhanced annuity; from minor factors such as smoking, having high cholesterol or being overweight up to more serious or life-threatening conditions such as cancers and heart disease.
Share all of your medical history and current medications to maximise your retirement income.
Use our online annuity comparison service to see whether your medical history and lifestyle could give you a higher income in retirement.
Why and how do I shop around for an annuity? +
When you retire you don’t have to stay with your pension provider to generate an income in retirement - you can shop around and compare other providers which could improve your retirement income.
You may see this referred to as the 'Open Market Option'. This simply means your right to shop around for the best retirement income via an annuity.
Our online annuity comparison service can help you to find a better annuity income for your retirement by:
- Obtaining quotes from a variety of annuity providers for you to compare with quotes your own pension provider offers.
- Establishing whether you qualify for any 'enhancements' due to health and lifestyle which could further improve your retirement income.
- Explaining all the options you have to protect your income against inflation, extend payments to your dependants etc.
- Showing you the effect that taking each option will have on your income.
- Ensuring you are able to choose the options knowing that they suit your needs.
You should check whether your pension has a Guaranteed Annuity Rate or other form of guarantee, and if you’re in any doubt you should check with your pension provider(s). These guarantees will often provide you with an income for life much higher than you might normally get. If you decide to move your pension pot elsewhere or use it other than to take an income you may lose these valuable guarantees.
What tax will I pay? +
Annuity income is subject to the Pay As You Earn (PAYE) tax regime. HM Revenue and Customs (HMRC) will inform your annuity provider of the tax code to apply to your income once you take out your policy.
If the value of all of your pension savings is above £1 million when you access your pot (2016-17 tax year) further tax charges may apply.
Warning - If a taxable lump sum is taken, then you could be taxed at an emergency rate and then have to resolve it through your tax code/office.
If you have any questions about how much tax you may have to pay you can contact them at your local HM Revenue & Customs tax office.
What happens when I die? +
If you have a single life annuity and no other features, your pension stops when you die. Otherwise, the tax rules vary depending on your age as shown below.
If you die before age 75
Income from a joint annuity will be paid to your dependant or other nominated beneficiary tax-free for the rest of their life.
If you die within a guarantee period the remaining annuity payments will pass tax-free to your nominated beneficiary then stop when the guarantee period ends.
Any lump sum payment due from a value protected annuity will be paid tax-free.
If you die age 75 or over
Income from a joint annuity or a continuing guarantee period will be taxable at the beneficiary’s marginal tax rate.
Joint annuity payments will stop when your dependant or other beneficiary dies and any guarantee period payments stop when the guarantee period ends.
Any lump sum due from a value protected annuity will be taxable at the beneficiary’s marginal rate.