What is an annuity?

Instead of taking a lump sum, you can use your pensions savings to buy an income that pays out for your entire life. These are called annuities. The shape and size of the annuity that’s right for you depends on your individual circumstances. You can even combine all your existing pension savings to buy one annuity that’s likely to give you a higher income than lots of smaller individual ones.

When opting to take an income, you still have the opportunity to take up to 25% of your pension money as a tax-free lump sum. What’s left is used to buy an annuity.


Top tip

Once an annuity is set up, that’s it. You cannot change your mind and it cannot be undone. So, think very carefully, consider all the options and get guidance and advice before deciding anything.

The income options

Escalating guaranteed income

Your income increases over time to try to keep up with inflation. It starts off low and increases by a chosen amount each year.

Level guaranteed income

This pays a ‘level’ fixed income, so the income it pays always remains the same amount. It doesn’t take into account any rises in inflation so if inflation rises, you could feel the pinch.

Lifestyle, Underwritten, Enhanced or Impaired

Got a medical condition, smoke, are overweight or drink alcohol regularly? Suspect this might shorten your lifespan? These annuities tend to pay a higher amount of income.

Single life

This option is an annuity that pays a guaranteed income for one, for life.

Joint life

Want to provide an income for someone if you die? Joint life allows you to nominate a dependant to receive a guaranteed income of your choice. It’s lower initially but gives a dependant an ongoing income for life.

Value protection

Want to protect your pension savings by up to 100%? Die before you benefit from the full value of your pension and value protection will pay the beneficiary a lump sum, minus any income payments and tax.

Essential facts

Tax situation

Income tax is deducted from earnings, so income from an annuity is taxable too. That also applies to a joint life annuity.

No going back

You cannot change your mind once you have set up an annuity.

Shop around

You’re free to buy an annuity from any provider, so don’t simply accept one from your existing provider’s. In fact, most people get a better retirement income from a different provider.

Compare annuities

We don’t provide annuities, so we recommend you shop around. There are online comparison sites to help you find the annuity that best suits your circumstances. Or speak to your financial adviser. If you don't have one, visit unbiased.co.uk to find an adviser in your area.


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