What is an annuity?
An annuity is a financial product that turns your pension savings into a guaranteed income for life or for a set period.
You buy an annuity from an insurance provider, and in return, you receive a regular, stable income in retirement.
Annuities provide certainty, ensuring you won’t run out of money no matter how long you live.
With different types available, such as lifetime or inflation-linked annuities, it’s important to seek pension advice to find the option that best fits your retirement plans.
Do you pay tax on annuities?
Yes, annuity income is taxable. Once you’ve taken any tax-free cash from your pension, typically up to 25% of the pot, the income you receive from an annuity is treated as taxable income, just like a salary.
This means the amount of tax you pay will depend on how much income you receive in total each year, including your State Pension, annuity payments, and any other sources of income.
Our pension advisors can help structure your retirement income in a tax-efficient way, ensuring you understand how purchasing an annuity might affect your overall tax position.
Where can I buy an annuity?
You can buy an annuity from a range of insurance providers and pension companies, but it’s important to shop around to find the best rates and terms.
Annuity rates can vary significantly between providers, and the difference can have a lasting impact on the income you receive throughout retirement.
We can help you explore the market and compare your approaching retirement options.
With expert pension advice, our team will guide you through the process, ensuring that if you decide an annuity is right for you, it offers the best possible value based on your circumstances.
What Are The Different Types of Annuity?
01 Level Annuities
A level annuity pays a fixed income that stays the same throughout your life.
While this provides certainty, it doesn’t account for inflation, meaning the real value of your income may reduce over time.
02 Escalating Annuities
Escalating annuities increase your income each year by a fixed percentage.
This helps your payments keep pace with the rising cost of living, although starting income is typically lower than with a level annuity.
03 Inflation-Linked Annuities
An inflation-linked annuity is designed to rise in line with an official measure of inflation, such as the Retail Prices Index (RPI) or Consumer Prices Index (CPI).
This option offers protection against the impact of inflation, ensuring your purchasing power remains steady throughout retirement.
04 Impaired or Enhanced Annuities
If you have certain health conditions or lifestyle factors, such as smoking, high blood pressure, or a serious medical diagnosis, you may qualify for an enhanced annuity.
This can provide a higher income based on a lower life expectancy. We can help assess your eligibility as part of our pension advice service.
05 Lifetime Annuities
A lifetime annuity provides a guaranteed income for the rest of your life, regardless of how long you live.
This is a popular option for those who want the security of knowing their income will never run out.
06 Joint Life Annuities
A joint life annuity pays an income to you for life and then continues to pay a proportion of that income to your spouse or partner after your death.
This option can provide ongoing financial security for loved ones.
07 Short-Term or Fixed-Term Annuities
A short-term or fixed-term annuity provides a guaranteed income for a specific period, such as five or ten years.
At the end of the term, there may be a lump sum payment, which can offer further flexibility in your approaching retirement options.
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