What is an annuity?
Securing a guaranteed income in retirement
When you purchase an annuity you exchange some or all of your pension for an income for retirement and the rest of your life. There are different types of annuities available from many different providers but once you make a choice you cannot usually change your mind (although this is expected to change from April 2017), so it is worth reviewing your options before making a decision. Under 2015’s pension changes you are no longer required to purchase an annuity upon retirement, but they remain an excellent option for people seeking a guaranteed income.
The different types of annuity
Although all annuities give you a guaranteed level of income for a set period of time (usually for the rest of your retirement), there are different types of annuity each with their own benefits and advantages. For example, unlike a conventional annuity an enhanced annuity will take your health and lifestyle choices into account when your rate of income is calculated.
What are the different types of annuity?
What happens to an annuity when I die?
Normally there are no further income or lump sum payments when you die, although some annuity providers give you options to protect your payments upon death. For example you could choose a guarantee period, which is a minimum amount of time for which payments are guaranteed, or a joint life option where your beneficiaries receive a pre-agreed level of income upon your death.
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How much income could I get?
A number of different factors will affect how much income you could get from your pension when you buy an annuity. These range from the size of your pension pot to your age, and from your postcode to your general condition of health. Different providers will also offer varying rates of income, but as you cannot usually change your mind afterwards it pays to use an annuity calculator to compare your options before making a decision.
Find out more about annuity rates
Do I need to use my whole pension fund?
There is no requirement to use your whole pension to buy an annuity. This means part of your savings could be used to purchase an annuity for living expenses, with the remainder held in a SIPP or other pension and available to withdraw through income drawdown or lump sums throughout your retirement.
Find out more about SIPPs
The decision to access your pension is an important one and will affect your income and possibly your standard of living for years to come. Therefore we recommend that before any decision is made you receive regulated financial advice or get free guidance from Pension Wise. Find out more about Pension Wise.