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What is an Annuity?

Annuities convert your pension savings into an income.

Be careful, any annuity or drawdown income benefit in respect of your pension(s) will be taxed at your marginal rate of income tax as member's pension income via PAYE.

An annuity is a financial product that enables you to convert your pension savings into a monthly or yearly retirement income for you to live on.

The amount you will get depends on things like how old you are: the younger you are when you retire, the less you get each year, whether you want your annuity to pay an income to your spouse or partner when you die.

It's worth thinking about talking to a financial adviser about the best type of annuity and which company will pay you the highest income.

Different Types of Annuity

There are many different types of Annuity. Find out More »

The main types of annuity include:

Type How it works
Single life Paid just to you, either for life or for a fixed number of years.
Joint life Payments continue to your spouse or partner after you die.
Fixed term Pays an income for a set number of years, then a guaranteed sum which you can invest or use to buy another annuity.
Short term Stops paying at the end of a set number of years (up to 5 years) or when you die (whichever comes first).
Guaranteed period Pays out for a set term even if you die within that term, eg you get a 10-year annuity and die after 7 years, your spouse or partner still gets payments for another 3 years or a lump sum.
Enhanced or Impaired May pay more than a standard annuity if you smoke or have a medical condition, eg diabetes or high blood pressure.
Escalating The amount increases each year to reduce the effect of inflation.
Level Pays a flat amount of income each year.
Investment linked Tied to the stock market, the amount it pays can vary and depends on the success of the investments.
Capital protected Your pot is paid to whoever you leave it to (your 'beneficiary') if you die within a set period, subject to tax.

Pensions Freedom

Since 6th April 2015, those with defined contribution money purchase pensions who have reached the minimum pension age (currently 55, rising to 57 from 2028) have the option to withdraw the money saved into their individual pension. As well as the purchase of a lifetime annuity (conventional / flexible) other options available are the purchase of scheme pension or to enter flexi-access drawdown or using some of the fund to provide an Uncrystallised Funds Pension Lump Sum (UFPLS).

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.