When you come to retire, 25% of your total pension fund can usually be taken as a tax-free lump sum; the rest can be used to buy an annuity.


What is an annuity?

An annuity is a type of insurance contract. Once purchased, the insurance company is responsible for providing you with a guaranteed income – any time from age 55 – which is payable for the rest of your life.


What are my options?

The rules governing annuities were changed when the flexible access rules to pensions were reviewed. Many are not aware of these changes, and while annuities are generally inflexible, the options do provide the opportunity to build in more certainty of value by:

  • providing protection on death for any beneficiary, not just defined financial dependents (such as a spouse or children)
  • extending the annuity guarantee period (the period over which the annuity will be paid) to your preference, where previously this was restricted to 10 years
  • offering value protection to guarantee that, at least, the annuity’s purchase price is returned in the event of death

Once it’s set up, an annuity is fixed and cannot be amended, so it’s vital that you think about your options carefully. You will need to consider both your immediate and long-term income needs when making your decision, including those of any spouse or partner. These factors will be important when deciding on the type of income you will need to receive; for instance, do you need your income to increase over time?

You will need to consider the following options when setting up your annuity:

  • Level income: your income will remain the same and won’t increase over time
  • Tracking inflation: your income will track the rate of inflation by moving in line with the Retail Price Index (RPI)
  • Fixed increase: your income will increase by a fixed percentage each year

Finding the best rate

You don’t have to stay with your existing provider when you retire, this is important as they may not offer you the best annuity income. Different annuity providers offer different annuity rates; the difference between the highest and lowest rates can be significant, so the option you choose could greatly influence your annual income.

Income paid is liable to tax at your marginal rate, but is only payable for as long as you live. An independent financial adviser is not restricted to particular providers and can search the whole of the market to find the best annuity rates.

If you would like any more information on annuities, or you are unsure about which pension option is right for you, please contact us to speak to an independent financial adviser.

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