An annuity provides a guaranteed income throughout your retirement. You can use the money you have saved in a pension to purchase an annuity which will then provide you with a monthly, quarterly or annual income for the duration of your lifetime.
You can purchase an annuity from the age of 55 (increasing to 57 in 2028) and the amount of income you get will depend on how big your pension pot is, your health, age and if you choose to guarantee your income.
Choosing an annuity is one of the biggest financial decisions anyone will have to make, so getting it right is crucial. Make sure you consider all the options available to you regarding your pension income. Changes that came into effect in April 2015 give more flexibility on how you use your pension pot, such as pension drawdown.
A joint annuity is for two partners wanting to receive a guaranteed annuity payment until the last partner has died. This usually pays a lower income than a single annuity, especially if one partner is younger and/or healthier. It is also possible to include a guaranteed period with a joint annuity. This means that after one partner dies during the guarantee period their annuity payment will be transferred to their partner for the remainder of the guarantee period.
You can choose a joint annuity where the income of the deceased partner continues to be paid to the surviving partner but at a reduced rate. This means your initial joint income can be greater, while still retaining some additional income for the surviving partner.
At the point you decide to start taking your pension fund as income, you can usually choose to take up to 25% of your fund as a one-off payment, free of tax. Of course, you don’t have to take any at all if you prefer.
With some providers you can choose to take additional cash lump sums, however anything above this will be taxed at your marginal rate. But beware, the more you take out at this stage, the less you’ll receive in your regular payments.
Current and past health conditions and your lifestyle, as well as those of anyone who is named on the annuity, could significantly increase your annuity income. By giving HUB Financial Solutions as much detail as you can, from your postcode through to your lifestyle and medical history, they could help you achieve more income during your retirement.
You can choose for your income to remain at the same amount, as it was the day you set up the plan. Alternatively, you can choose for it to increase annually to offset the effects of inflation, however this will result in a lower starting income.
You can choose how often you want your annuity income to be paid. For example, you may want to receive it monthly or annually, or perhaps every six months? You can also choose whether you want to be paid in advance or arrears.
Annuities offer different features that may be more suitable depending on your circumstances and needs.
An enhanced annuity can pay you a better income than a standard pension annuity, as it takes into account your lifestyle as well as your medical and occupational history. As your life expectancy could be reduced by your health and lifestyle, annuity providers calculate that they’ll have to pay you an income for a shorter amount of time, so can afford to pay you more during that period.
If you live longer, you’ll still receive the same heightened level of income – annuity payments are guaranteed for life, however long that may be.
Importantly, enhanced annuities are priced according to your individual specifications, so may consider some or all of these factors:
While all of this is unpleasant to think about, you may be able to secure a far higher retirement income by purchasing an enhanced annuity – as long as you are completely honest on your application. You don’t even need to have a serious medical condition to qualify. If you have any form of health or lifestyle condition that could impact your life expectancy, even something as simple as drinking alcohol, you could receive an increased income (though the level of uplift will depend on the severity of your condition).
An escalating annuity starts with a lower regular annuity payment than a traditional annuity. Your income will increase every year either by a fixed rate selected at the point you take the annuity or by inflation. It will take quite a few years for an escalating annuity to 'catch up' with a traditional annuity.
Compare annuity rates to get the best deal
You don’t have to buy your annuity from your pension provider.
Speaking to an annuity broker could get you a better annuity rate.
Our preferred annuity broker, HUB Financial Solutions, can help you. Compare annuities online today or call the team direct on
01737 233 435 and quote MF106
Lines are open Monday to Friday, except Bank Holidays, 9am to 8pm and call charges may apply. Calls may be monitored for regulatory purposes.
A pension annuity is still the only product that will give you a guaranteed income for life paid regularly to you for the whole of your retirement.
You can also enjoy:
If you have a defined benefit or final salary pension, then this will provide you an income instead of an annuity.
There are alternative sources of retirement income to an annuity, these are:
It may not be possible to change annuity providers later and there may be tax implications from these choices, so it is recommended that you speak to an independent financial adviser. You can also try Pension Wise, a free and impartial government service that offers guidance to people approaching retirement.
If you are 55 or over and own your own home, you could consider using equity release to significantly boost your retirement income. Depending on your age, you can release up to 40% of the value of your home and continue to live there, usually without having to make any repayments.
It is possible to buy an annuity and for your beneficiaries to benefit after your death. You can do this by buying an annuity with a guaranteed period or value protection. A joint annuity is also another way to make sure your partner continues to receive an income after your death.
An annuity with a guarantee period allows your beneficiary to receive your annuity payments if you die before the guarantee period ends. Your beneficiary will receive this until the end of the guarantee period. Usually this is over five or 10 years, but some annuity providers will allow up to 30 years. If you die after the guarantee period has ended, then your annuity payment will stop. Although a short guarantee period has little impact on the amount you will receive, longer guarantees will result in a lower starting income.
An annuity with value protection pays out a lump sum to your beneficiaries if you die before a certain period. This is unlike a guarantee period that instead pays out the regular income of your annuity when you pass away before a certain time.
Your beneficiaries will not have to pay tax on your annuity income if you die before your 75th birthday.
Some pensions, particularly older ones, offer a Guaranteed Annuity Rate (GAR). A GAR may be quite a bit higher than those available on the open annuity market, particularly given that the average annuity income has dropped substantially over the last few years.
The younger you are when you purchase your annuity, the less of an income you will get, as the provider will assume that they will have to pay you an income for a longer period.
Although you can purchase an annuity from the age of 55 (please note the government has confirmed this will change to age 57 from 2028), there is no requirement for you to actually retire when you start to receive your annuity income. When you purchase your annuity is up to you – just keep in mind that the older you are, the greater the annual income you are likely to receive.
Another option when you purchase your annuity is to take a portion of your pension pot (usually up to 25%) as a tax-free lump sum. Bear in mind, however, that any cash you take from your pension will reduce the amount you have left to buy an annuity with. This would mean a lower income in retirement. The decision to take tax-free cash will be based on your circumstances and objectives. You may wish to pay off a debt, gift money to family, make home improvements, take a holiday or spend a lump sum on something else.
If you are in any doubt over whether to withdraw some of this cash, you should seek professional advice.
The Annuity Service is provided by HUB Financial Solutions Limited. HUB Financial Solutions Limited. Registered office: Enterprise House, Bancroft Road, Reigate, Surrey RH2 7RP. Registered in England and Wales no. 05125701. HUB Financial Solutions Limited is authorised and regulated by the Financial Conduct Authority. Part of Just Group plc. Moneyfacts.co.uk itself is not authorised by the Financial Conduct Authority for annuity business, so we refer our customers to HUB Financial Solutions’ regulated service.
Any legal or contractual relationship will be with HUB Financial Solutions. HUB Financial Solutions does not offer advice on investments, and is paid commission by your chosen annuity provider, the cost of which is included in your annuity quotation.Disclaimer
This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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