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 valueThe 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 futureOnce 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.
-
3. The income can stop when you dieDepending 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.
An important scams warning
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
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.
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
Ask for a free, no-obligation Pension Potential pack showing your personalised options for taking your pension savings.
Your FREE Pack
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.
-
Tailored insight
If guaranteed income (annuity) appeals to you, use the Pension Potential annuity finder to shop around for your own tailored annuity.
-
Expert insight
Once you’ve looked into your options, ask for a call with one of our friendly retirement experts.
Maximise
your pension potential
Check out our other EasyFacts
