When it comes to retirement planning, a pension annuity can be an attractive financial option to some as it provides a guaranteed income stream during retirement.

What is a pension annuity?

A pension annuity is a financial product that provides a guaranteed income during retirement. The annuity is usually purchased from an insurance company using some or all of your pension savings. They will then pay you fixed income for the agreed length of time. The amount of income you receive depends on factors such as your age, health, the size of your pension pot and the prevailing interest rates.

An annuity can provide a regular income like a salary, which can be particularly appealing for those who want to ensure a stable income in retirement. However, it is important to work with a financial adviser to find the best annuity rate, as the income you receive can vary significantly between providers. All of the income from a pension annuity is treated as taxable income for income tax purposes.

A pension annuity is different to a pension drawdown which is when you take money out of your pension savings as an income, but the remaining amount stays invested, which means your pension pot could increase or decrease over time depending on how much you take, and the return on your investments.

Investment involves risk. The value of investments can fall as well as rise. You may get back less than you originally invested. Bear in mind that tax rules can change and their impact on you will depend on your circumstances.

Types of annuity

There are different types of annuity plans:

Lifetime annuity

A lifetime annuity can offer a guaranteed income for the rest of your life. It is a good option for those who do not want their pension pot to be subject to any investment risk and are generally risk averse. It provides peace of mind and eliminates the worry of running out of money.

Fixed-term annuity

A fixed-term annuity is a product that offers a guaranteed income for a specific period of time. The annuity provider invests the money paid for the product, and at the end of the term, the customer will receive a maturity amount. This lump sum is equal to the initial investment plus the investment growth, minus the income received so far. At the end of the term, you can choose to renew the annuity, take the remaining balance as a lump sum, or move it into drawdown, ready for you to use some or all of it when you wish, or buy a lifetime annuity if that works best for you then.

Enhanced annuity (also known as ‘impaired life’ annuity)

If you have any health issues that could potentially reduce your lifespan, you might want to consider an Enhanced annuity. This type of annuity pays out a higher income if your health or lifestyle may shorten your lifespan, such as smoking or existing health conditions. Talking to a financial adviser who can evaluate your situation is recommended to determine whether you're eligible for an enhanced annuity.

Investment-linked annuity

With this type of annuity, you can choose the guaranteed income level you want, and a portion of your pension fund will fund this. The remaining amount will be invested. If markets are performing well, then your income will be higher. However, you may only receive the minimum guaranteed amount if the markets fall.

Why get a Pension annuity

The main reason to consider getting a pension annuity is the comfort that you have financial security and certainty as you'll be receiving a regular, fixed income during your retirement. Other benefits include;

  • Flexibility only to use a percentage of your pension pot to purchase an annuity.
  • Policy type options that can pass on all or a proportion of guaranteed income to a dependent after your death
  • Annuities do not require ongoing decisions to be made in later life when this can be more difficult for some
  • This type of pension benefits those who prefer a lower level of financial risk.

Things to consider

  1. Once you have purchased an annuity, it can be difficult to make changes to it so do your research before making your decision or consult a financial adviser who can help choose the right one for you.

  2. When you opt for a pension annuity, the income value you receive may be lower than other types of pensions.

  3. If you do decide to take out an annuity policy, it's not necessary to purchase it from your current pension provider.

  4. Inflation may affect the overall value of your income depending on the type of policy you have.

  5. Your income will stop when you pass away unless you have a dependent's income or a guaranteed period in your annuity. You will also have to pay income tax on your annuity income, which will reduce the amount you have to spend. Learn more about tax when you get your pension on the Government website

Why work with Ascot Lloyd to navigate pension annuities

Ascot Lloyd's financial advisers provide expert advice on annuities and other essential steps towards planning for your retirement.

There are different types of annuities available, but not all of them will be appropriate, and providers offer different rates, which would impact your retirement income; therefore, knowing which annuity is the right one for you can be confusing.

Our advisers will consider all this and other areas, such as your risk appetite, retirement goals, and personal health, before deciding if an annuity is right for you.

We are also an independent financial advisory firm means we are not tied to certain partnerships or product solutions; therefore, we can search the whole market to find the most appropriate solutions to help you reach your retirement goals.

Is an annuity right for you?

Our financial advisers provide expert advice on annuities and other important retirement planning steps. If you're looking for more guidance, our independent financial advisers are here to help.

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Frequently asked questions

What is the difference between a pension annuity and purchased life annuity?

A pension annuity differs from a purchased life annuity because a pension annuity has to be bought using funds from your pension, and all of the income is treated as pension income for income tax purposes. You should take your tax-free cash element of your pension before buying your annuity. A purchased life annuity, on the other hand, is a type of annuity that is bought with savings or investments outside of a pension plan.

Can you have both a pension annuity and a drawdown pension?

Yes, it is possible to have both a drawdown pension and an annuity. For instance, you can use the drawdown pension to cover the majority of your pension pot, and then the annuity can be a helpful addition to your income mix. This is particularly useful in covering regular living expenses that you will always need to meet.