Annuities

In this period of uncertainty, I’ve received queries from clients about annuities, pension annuities are one of the options for turning your pension savings into a regular income during retirement. The following information will give you a good baseline knowledge but please don’t hesitate to get in touch if you have any questions.

💡 What is a Pension Annuity?

A pension annuity is a financial product you can buy with some or all of your defined contribution pension pot. In return, the provider pays you a guaranteed income for life (or for a fixed period, depending on the type).

🔑 Key Features

• Guaranteed Income: You get regular, reliable payments—monthly, quarterly, or annually.

• Lifetime or Fixed Term: Most annuities are lifetime annuities, but some can last for a fixed number of years.

• Health/Medical Factors: If you have health issues or lifestyle risks (like smoking), you might qualify for an enhanced annuity with a higher income. You are likely to get better terms if you have health issues that could impact your life expectancy as the annuity provider may calculate that they would be paying you for a shorter period of time.

There are additional extras that you can select to enhance the annuity, however they will usually add to the cost too:

• Single or Joint: You can choose an annuity that pays only you, or one that continues to pay a partner after your death.

• Inflation Protection: You can opt for your payments to increase each year to keep pace with inflation—but this lowers the starting income.

💰 How Much Will You Get?

The income you could receive depends on a number of factors:

• How much you have built up in your pension pot

• Your age and health

• Current annuity rates (linked to interest rates and life expectancy)

• Annuity options you choose (e.g., inflation-linked, joint annuity)

✅ Pros

• Income is guaranteed for life (or for the set term), this will help with your retirement planning and give you certainty over what you will receive and when.

• Peace of mind—no investment risk and exposure to the volatile markets or risk of running out of money

• Once set up they are simple and low-maintenance products

• Once purchased you had your pension pot (or the amount you’ve agreed to pay at least) to the provider and that lump sum is outside of your estate for Inheritance Tax purposes

⚠️ Cons

• Generally irreversible—you can’t change your mind later

• Poor value if you die early, unless you’ve added a guarantee to repay x% if you die within a set period of time – so difficult to plan for without knowing our futures

• Doesn’t allow flexibility (unlike pension drawdown) – once purchased you lock in the set payments and have no ability to increase or decrease the payments to you

• No lump sum legacy left to hand to your beneficiaries, the inheritance options are limited unless you choose them at the start (e.g., guarantee period or joint annuity)

🛠️ Alternatives

• Drawdown: Keep your pension invested and withdraw income as needed (more flexible, more risk). This is proving to be the most popular rout in retirement now due to the control, you determine what you want in terms of income and when you want it, this can help with income tax planning and inheritance tax planning.

• Lump Sums (UFPLS): Take cash directly from your pension pot.

• Combination: Use part of your pot to buy an annuity and leave the rest in drawdown. Some flexibility and some security of known income, if you have the luxury of a pension pot large enough to facilitate this plan.

🧾 Tax

• You can usually take 25% of your pension pot tax-free.

• The remaining 75% used to buy an annuity is taxable as income when it’s paid out to you.

Call or e-mail me to chat some more about annuities.

• The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.

• Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal circumstances. Taxation and pension legislation may change in the future.

• Drawdown pension plans (unsecured income) are complex and are not suitable for everyone. Pension decisions can affect your income for the rest of your life (and that of any partner and other dependants). Where benefits are accessed on a flexible basis, these are not fixed or safeguarded for life. If security of income is important to you then you should consider purchasing an annuity or taking a scheme pension to provide a secured level of income.

• This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.