Search
Close search
    View all results
    Contact Us

    Pension annuity

    An annuity lets you turn your savings into a regular income and is a reliable way to cover regular expenses in retirement.

    What is an Annuity?

    Annuities are a popular option for those who have saved into Defined Contribution pension schemes during their working life. Purchasing an annuity lets you convert savings into a guaranteed income – with on a regular basis, a bit like salary.

    The amount of the annuity will depend on how much you can pay at the start and the options available from providers – which is why it’s important to find the most suitable plan for you and your circumstances. Any annuity income will be guaranteed, so there will be no surprises when it comes to how much you’ll receive or when.

     

    Using your tax-free cash

    When you’re ready to cash in your pension savings – whether or not you choose to buy an annuity – Pension Freedom rules allow you to take 25% of this amount as tax-free cash within allowable limits. You can choose to take this amount before buying an annuity, but will need to pay income tax on the annuity payments.

    Ready to access your pension? Find out your options

    Types of pension annuities

    • What types of annuities are available?

      What types of annuities are available?

      It’s a good idea to explore the options available for your pension pot (not just annuities) before looking at the different types of annuity. A financial adviser can help you consider different scenarios to understand what would be most suitable for you, including ill health and your appetite for risk.

    • Level annuity

      Level annuity

      Level annuities provide the same income each year, but can leave you vulnerable to inflation which may affect your standard of living.

    • Escalating annuity

      Escalating annuity

      These annuity payments increase each year at a fixed rate, but may start at a lower level than other annuities.

    • Inflation-linked annuity

      Inflation-linked annuity

      Inflation-linked annuities rise in line with the retail prices index, but will start at a lower rate.

    • Enhanced annuity

      Enhanced annuity

      Enhanced annuities pay out a higher amount for those with health conditions which may affect their life expectancy. It’s important to talk to your provider to find out your eligibility.

    • Joint life annuity

      Joint life annuity

      These annuities will pay an income to a loved one after your death, usually a percentage of your usual annuity payments.

    • Lifetime annuity

      Lifetime annuity

      These will pay you an income for the rest of your life, unlike a short-term or fixed-term annuity.

    • Short-term annuity

      Short-term annuity

      These annuities last for a fixed period, decided when purchasing the policy (usually 3 to 25 years). You can still choose to buy a lifetime annuity once your short-term annuity expires.

    Please note: these features are only a guide to the variety of annuities available. The exact features you receive will be specific to your annuity plan – so make sure you check your plan details carefully.

     

    Benefits of annuities

    There are many benefits to choosing an annuity as part of your retirement income.

    Is an annuity right for you?

    Despite the benefits, whether or not an annuity is the right option for your retirement income will depend on:

    • the size of your pension pot
    • your age when you buy your annuity
    • how long you want the annuity to last – for a fixed term or for your lifetime
    • annuity rates at the time of purchase
    • your health and lifestyle
    • which type of annuity you choose, the provider, income options and features you choose.

    It’s worth remembering that an annuity is not an ‘all or nothing’ choice. You can purchase an annuity to cover your regular bills and leave the rest of your pension pot in drawdown, or purchase an annuity later on in retirement.

    Annuities can be irreversible

    It can be very difficult to cancel, change provider or get your money back once you’re past any initial cooling off period. It’s essential that you understand your plan and are confident with your choice before going ahead and purchasing an annuity.

    What’s the difference between a pension annuity and a pension?

    Your pension pot is the savings you have built throughout your working life, where at retirement age you can decide how you’d like to use it to support your lifestyle.

    An annuity is a way of using that pension pot to give you an income in retirement – but it isn’t your only option.

    Find out more about retirement planning Get in touch

    Alternatives to buying an annuity

    When you’re ready to retire you’ll have several choices to make around how you want to use your pension savings. Annuities aren’t necessarily right for everyone, as they don’t offer flexibility in how you can take your income, and once they’ve begun it can be impossible to make any changes.

    Find out more about other options for your pensions

    How can Wren Sterling help plan your pension

    With a Wren Sterling expert on your side, we’ll make recommendations for how to make the most of your money – and crucially – we’ll make sure you understand what it means for you, and how it works so that you can feel more confident in your financial future.

     

    Talk to a local expert

    FAQs

    • Do you pay income tax on an annuity?

      Do you pay income tax on an annuity?

      The income you receive from an annuity will be taxed in the same way as income from a job. Most annuity providers will work with HMRC and deduct your tax from each payment for you, so any amount you receive is yours to keep.

    • How much retirement income will I get from an annuity?

      How much retirement income will I get from an annuity?

      How much income you will receive from an annuity will depend on:

      • the size of your pension pot
      • your age when you buy your annuity
      • how long you want the annuity to last – for a fixed term or for your lifetime
      • annuity rates at the time of purchase
      • your health and lifestyle
      • which type of annuity you choose, the provider, income options and features you choose.

    • What is a fixed-term annuity?

      What is a fixed-term annuity?

      Fixed-term annuities will guarantee income for a set period (usually between 3 and 25 years). When the annuity will mature is decided on purchase. These annuities can sometimes be called a ‘short-term annuity’, which actually refers to any annuity bought with drawdown funds that will last 5 years or less.

    • Can you contribute to a pension if you purchase an annuity?

      Can you contribute to a pension if you purchase an annuity?

      Yes, you can still contribute to a pension pot, even once you’ve begun to draw on your retirement income. However, if you’re classed as having flexibly accessed your pension pot, the Money Purchase Annual Allowance will then apply which limits the amount you can save into a pension fund tax efficiently. The purchase of a lifetime annuity that can’t decrease in value isn’t classed as flexible access and wouldn’t cause the MPAA to apply.

    • How can I choose the best type of pension annuity?

      How can I choose the best type of pension annuity?

      The ‘best’ annuity will depend on you and your circumstances. Our advisers can provide a recommendation based on your financial situation and retirement expectations.

    • How do pension annuity rates work?

      How do pension annuity rates work?

      Annuity rates determine how much income you will receive in return for the amount of your pension pot you use to purchase it. Annuity rates are influenced by interest rates and gilt yields (as annuities are partially funded by government bonds.) You may choose to wait to purchase an annuity in the hope that annuity rates improve. Most providers provide an annuity calculator on their websites to quickly provide an estimate of how much your funds will provide.

    • Can your annuity income change?

      Can your annuity income change?

      Once you’ve set up your annuity and have gone past the cooling off period, it is impossible to change. If you want an income which increases in any way, it is important to select these features when purchasing your annuity.

    [1] Subject to being within allowable limits, each UFPLS payment is 25% tax free (although it is possible from 2024/25 to take an UFPLS with a lower (or no) tax free element). And if funds are placed in drawdown there would also be the option to take up to 25% PCLS upfront (or phased).

    A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

    The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change. You should seek advice to understand your options at retirement.