Create a regular pension income

Pension Annuities

What are Pension Annuities?

Annuities, sometimes referred to as a ‘regular guaranteed retirement income’, can be bought with all or some of your pension pot. When you buy an annuity, it pays income for life or for an agreed-on number of years. These will be bought through insurance companies. 

When using your pension pot to buy an annuity, you can take up to 25% of the amount as tax-free cash, with the rest used to buy the annuity. Any income you receive from the annuity will be taxed as earnings.  

There are several types of annuities, including lifetime, fixed-term, enhanced, investment-linked, and purchased life annuities. 

Speak to a Chartered Financial Planner about what these types could mean for you. 

What are the benefits?

Some annuities have no contribution limit, meaning retirees can make investments and accumulate growth tax-free. This can be especially beneficial for those wanting to build their overall pension pot. Contribution rules vary depending on the annuity, though, so always check individual requirements before purchasing.

Couple approaching retirement meet with their financial planner to review their pension annuities.

What are the potential risks?

Just like most pension options, annuities come with a level of risk which varies depending on the type. For example, fixed pension income may fall behind inflation (though there are some options which adjust for inflation). A fixed annuity also means you won’t benefit from positive market performance – though this also means you are unlikely to weather poor market performance. You could also outlive your annuity, depending on the payout you choose. 

These risks are all things your financial planner accounts for in your plan.

Before setting up a pension annuity, it is important that you discuss these risks with a Certified Financial Planner.

How do we plan for pension annuities?

A conventional annuity is an income for the rest of your life, which you ‘purchase’ with some, or all, of the money you have accumulated in your pension fund throughout your working life. But there are variations in annuity types which must be considered when creating your retirement plan 

After getting to know your circumstances and goals better in the Discovery Meeting, we can assess which annuity (if any) is right for you. 

We can then build some variables into your annuity, of which the most common are an income for a spouse and the option to have your income from the annuity increase each year. 

Talk to an adviser

Questions we get asked a lot

You can choose to have your payments paid to a loved one after you die. 

Yes. You can withdraw all your money from an annuity. But this will likely result in taxes or penalties, determined by factors like your age, annuity type, and how you take your annuity. 

Annuities are not issued by banks, but insurance companies. Therefore, they will likely be unaffected if the market crashes.  

Annuities can be impacted by other events, however. For instance, in the event of insolvency for the insurance company, there are only some protections for annuities.  

How much your annuity pays you depends on the cost and type of annuity. 

For instance, if you buy a £100,000 annuity, you will have a guaranteed income of around £4,600 per year for the rest of your life (after you have taken your tax-free 25%).  

There are many different types of annuities. These include: 

  • Lifetime annuities  
  • Joint lifetime annuities 
  • Enhanced annuities  
  • Deferred annuities 
  • Variable annuities 
  • Immediate needs annuities  
  • Purchased life annuities  

An annuity income is a regular, guaranteed income you can receive in retirement. It pays income either for life or for an agreed number of years. 

When buying an annuity, you can use some or all your pension pot.  

A fixed term annuity is what you might buy if you are looking for a guaranteed income in retirement without wanting to make a lifelong commitment with your pension pot. 

It gives you income in retirement for an agreed number of years.  

Your pension is a pot which you build throughout your life. Many of us will start saving into a pension pot from our very first job, with employers also commonly contributing. When you reach retirement age (and retire) you access these savings to sustain your lifestyle.  

An annuity, on the other hand, is a product you buy which converts your pension pot into guaranteed regular income for the rest of your life or an agreed time period.  

Every annuity has a current interest rate and a minimum guaranteed interest rate.  

The annuity rate is the element of an annuity which determines how much your annual income will be. The amount of each income payment is generally set when the payments start.  

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