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Could guaranteed income (annuity) be right for you?

Taking a guaranteed income could free you up to get on with life without worrying about where your money is coming from. The downside is: once you’ve bought your annuity, you can’t change your mind.

Lifetime and fixed-term annuities - what’s the difference?

  • Lifetime annuities

    Lifetime annuities – which pay a guaranteed income for the rest of your life – are fairly straightforward, even though there’s a lot of choice. You can use our Pension Potential annuity finder to search the whole market, get personalised quotes and buy your annuity – all in one place. Any fees will be paid by commission from the annuity provider.

    Buying a lifetime annuity doesn’t trigger the money purchase annual allowance (see Take care with tax allowances below).

  • Fixed-term annuities

    Fixed-term annuities, on the other hand, are more complicated. For example, your income can be guaranteed or linked to investment – so you’d need to choose investment options. As a result, you’ll need to take financial advice if you want a fixed-term annuity. We offer competitive rates for financial advice, but it still makes this type of annuity a more expensive option.

    Also, buying a fixed-term annuity triggers the money purchase annual allowance (see Take care with tax allowances below).

Now, let’s take a good look at guaranteed income (annuity)

Good things about guaranteed income

  • 1. Guaranteed for life (or a fixed length of time)

    Annuities are guaranteed to pay out for life (or for the length of time you choose). So, you won’t have to worry about where your income’s coming from.

  • 2. Choice and flexibility

    You can tailor your annuity income to your personal circumstances. There are lots of choices for tailoring your income.

    • You can choose a level annuity, which gives you a higher income to start with but doesn’t increase in future.
    • You can add extras such as:
      • yearly increases (fixed or in line with inflation)
      • a pension for someone close to you if you die before them
      • a guarantee that the income will continue for a certain time, even if you die during that time, and
      • value protection, where you protect part or all of your pension savings as an amount to be paid to your beneficiaries - then, after you die, your annuity provider takes off the income you’ve received and, if there’s any money left, pays it to your beneficiaries.
    • If you have a health condition that could shorten your life, your medical information could potentially get you a higher income.
    • You can choose an annuity that pays a guaranteed income for a fixed length of time, such as five or 10 years. Fixed-term annuity policies usually include a ‘maturity value’ paid back to you at the end of the fixed period.

    Be mindful that each extra you add will usually make your yearly income smaller.

  • 3. Straightforward tax

    You pay tax on your guaranteed income in the same way as earned income. For most people, this means your retirement income is taxed at your highest rate of income tax for the tax year (6 April-5 April). Your annuity provider usually takes the tax off your retirement income and pays you the net income (the amount after the tax has been taken off).

    Before buying your annuity, you can normally take up to a quarter of your pension pot as tax-free cash. You can then use the rest to buy your annuity – but remember, this will make your guaranteed income smaller because it’s using a smaller pension pot. If you use all your pension pot to buy your annuity, the whole of your guaranteed income will be liable for tax.

Not-so-good things about guaranteed income

  • 1. Annuities can look like poor value
    The amount of yearly guaranteed income you’ll get from an annuity can look low compared to the amount in your pension pot. And any extras you add – such as tax-free cash, increases, or a pension for someone close to you – will make your yearly income smaller. But remember: the income is paid for the rest of your life (or a fixed time). If you multiply your annuity by an estimate of the number of years you expect to live, it could look quite different. The Office for National Statistics has a life expectancy calculator you can use to help estimate your life expectancy.
  • 2. You can’t usually change your choice in the future
    Once you’ve started getting income from your annuity, you can’t usually change it – so it’s important to ensure you’ve made a good choice by shopping around and getting guidance or advice.
    Find out how we helped Rhodri get better value from his guaranteed income by  shopping around.
  • 3. The income can stop when you die
    Depending on what kind of annuity you choose, the income can stop completely when you die, with nothing left over. You can choose an annuity that pays a pension to someone close to you, but that will stop when they die. Or you can choose value protection, where you protect part or all of your pension savings as an amount to be paid to your beneficiaries when you die – so they get this amount, less the pension payments you’d already received.

Take care with tax allowances

If you’re thinking of taking some of your retirement savings while you’re still saving into a defined contribution pension, you could lose tax relief on future retirement savings.

When you’re saving into a pension you benefit from tax relief, as long as:

• your own contributions (to all your pensions) are less than 100% of your salary, and
• total contributions (again, to all your pensions) are within the annual allowance – currently £60,000 a year for most people.

This allowance includes your and your employer’s contributions to your pension pot, and your contributions to any personal or stakeholder pensions you have outside work.

However, if you start taking your retirement benefits and still want to carry on saving for retirement, this allowance could fall to £10,000 a year (known as the money purchase annual allowance). The money purchase annual allowance usually applies if you take cash, other than tax-free cash, start taking flexible income, or buy a fixed-term annuity.

An important scams warning

Taking retirement benefits puts you right in the firing line for pension scammers. According to The Pensions Regulator, scam victims have lost between £1,000 and £500,000 from their pension savings. This could be your life savings. Keep the scammers away from you by visiting the ScamSmart website.
Visit ScamSmart

We can help you maximise your potential

Pension Potential offers expert guidance and lots of support to help you understand more about your retirement options.

We don’t offer financial advice through Pension Potential. But, if you decide you need financial advice, we can refer you to our expert financial planners who offer this service.


Guidance is intended to help you understand your retirement options. It won’t make specific recommendations or tell you what you should do.

  • Personal insight gives you a personalised overview of the options available to you, but won’t recommend which option would be best for you.
  • Tailored insight enables you to use our annuity finder to search the market and buy an annuity. Any fees will be paid by commission from the annuity provider.
  • Expert insight offers the option of talking to an expert who will give you help and guidance, but won’t be able to recommend specific options unless you decide to take, and pay for, financial advice. They can discuss this with you.

Financial advice

Financial advice is a regulated professional service that will take your situation into account and make recommendations for options and products.

You may need financial advice if you’re interested in more complicated retirement options such as flexible income (drawdown), or mixing two or more retirement options.

You’ll need to pay for financial advice. We offer financial advice from highly-qualified chartered financial planners, with competitive charges.

Download our financial planning guide


We’ll always tell you in advance if there’s a charge for any guidance or advice you take from us.

Help to make sense of all the options

Guaranteed income comes with a lot of choice. Choice is good – but it can also be overwhelming. Here at Pension Potential, we’re experts on guaranteed income and the other pension freedoms. We can help you make sense of all the options.

Ask for a free, no-obligation Pension Potential pack showing your personalised options for taking your pension savings.

Download your pack from the Pension Potential hub 
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Are you ready to maximise your pension potential?

  • Personal insight

    Go to our Pension Potential hub to get a free retirement pack with personal insights just for you.
    Find out more about us
  • Tailored insight

    If guaranteed income (annuity) appeals to you, use the Pension Potential annuity finder to shop around for your own tailored annuity.
    Go to the Pension Potential hub to access our annuity finder
  • Expert insight

    Once you’ve looked into your options, ask for a call with one of our friendly retirement experts.
    Book your call on the Pension Potential hub 
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