Pension Potential | What is an Annuity Pension?
A pension annuity is a financial product that converts your pension pot into a guaranteed regular income for the rest of your life or for a fixed term. It’s a way of securing your retirement income using your pension savings, typically after taking a tax-free lump sum (up to 25% of your pot). You can buy an annuity from a pension provider with some or all of your pension, and once it’s set up, you’ll start receiving monthly or yearly payments.
Key themes at a glance
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5 mins
What you need
Open Market
Guaranteed Income
Tax
The Pros of Annuities
Choice and Personalisation
When you buy an annuity, you can tailor your annuity income to your personal circumstances. There are many ways to structure your payments, including:
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Annual payments that begin at a starting income, with increasing income at a fixed rate or with inflation-linked annuity options, such as the retail price index
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A joint life annuity, which continues to provide income for the rest of your spouse or partner’s life after you die
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A guaranteed income period, where regular income continues for a fixed number of years, even if you pass away sooner than your life expectancy
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Value protection, which ensures that your remaining funds (less what you’ve already received) go to your beneficiaries
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The ability to buy an annuity earlier than the regular pension age if you have a protected pension age or have bad health
Annuities work by offering guaranteed income, security and predictability. They are a popular option for those who want to remove investment risk from their pension plan.
Enhanced Annuity for Higher Income
If you have poor health or certain lifestyle factors that may reduce your life expectancy, you could qualify for an enhanced annuity, which may provide a higher income. Always disclose any relevant medical conditions to get the best possible annuity rates.
Simplicity and Secure Income
One of the major pension annuity benefits is its simplicity. Once it’s set up, you don’t have to manage it beyond paying tax. Your pension annuity payments arrive regularly, providing a secure income in retirement for the rest of your life. Many retirees appreciate this peace of mind, especially if circumstances change, or they don’t want to worry about managing investments.
The Cons of Annuities
Lack of Flexibility
Once you buy an annuity, the terms are fixed. You can’t change it later, even if your circumstances change. That’s why seeking pension advice from a financial adviser and using an annuity calculator is recommended before making any decisions.
The Income Can Stop When You Die
With a standard annuity, payments may stop upon your death unless you've chosen options like a guarantee period, joint lifetime annuities, or value protection. If none of these are included, the provider may keep the remaining funds. It's important to understand how your annuity converts your pension fund and what happens if you die earlier than expected.
Potential Lack of Value
The income from an annuity may seem low compared to your whole pension pot, especially if you’re comparing it to other pension income options. However, the annuity payments are made for the rest of your life (or for a fixed period in a fixed-term annuity), which may offer better long-term value depending on your retirement age and how long you live.
Tax Considerations
While the initial lump sum is considered tax-free cash, pension annuity income payments are treated as income and may be subject to income tax depending on your total retirement income and personal allowance. You’ll usually pay income tax on anything over your tax-free amount. It's important to understand the tax treatment and current tax rules, especially if you’ve taken a lump sum payment or are accessing your annuity alongside the state pension.
Final Thoughts
Whether you're an existing customer reviewing your options or preparing to cash in your pension pot, it's important to understand how much income an annuity might offer, what flexibility you need, and how to get the best annuity rates.
Use an annuity calculator, seek guidance from professionals like Pension Potential, and consider speaking to our annuity experts, available Monday to Friday, to get tailored pension guidance. A good financial adviser will help you assess your needs and determine whether a lifetime annuity, escalating annuity, or fixed term product is right for you.
Don't be stressed about your pension options. Get expert pension advice and easily take control of your retirement, today.
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