Annuities

An annuity is a financial product that can provide a guaranteed income, typically during retirement, in exchange for a lump sum. Annuities can offer certainty, particularly if you want to know how much income you will receive each month or year. The income you’ll get depends on factors such as your age, health, pension fund and current annuity rates. There are different types of annuities, so choosing the right option requires careful consideration.

To buy an annuity, you first need to consider how much of your pension you want to use and the level of income you need in retirement. You can then request quotes from different annuity providers, either directly or through an adviser. Compare the annuity rates and terms carefully, including options such as inflation-linked income or benefits for a partner. Once you have chosen the most suitable option, your pension funds are transferred to the provider and your income begins.

There isn’t a set price for an annuity. The amount you need really depends on how much income you want in retirement. For example, a larger pension pot could give you a higher income, but the amount you’ll receive also depends on the annuity rates available when you buy. Your age, health and the type of income you choose can all affect the quote you’re offered. To put it simply, how much it’s going to cost to buy an annuity depends on you!

An annuity is essentially a way of turning some of your pension savings into a regular, guaranteed income. You give an insurance company a lump sum and, in return, they pay you an income either for a set period or, in many cases, for the rest of your life. You can also choose options such as an income that increases over time or continues to a partner after you die.

Usually yes, an annuity is an income, and therefore income tax does apply. Tax is normally deducted automatically through PAYE. The amount you pay can depend on your other income, available tax allowances and the level of annuity income you receive. When considering annuities, it is therefore important to look at the tax position alongside your wider retirement income and financial plans. So, if an annuity was your only income, and you earned below the income tax thresholds you wouldn’t pay tax, but for most people you will have tax to pay.

You don’t necessarily need to use a pension to buy an annuity, you can also use other savings or investments, depending on the type of annuity. However, buying one this way can have different tax implications. If you’re considering an annuity, it’s worth looking at where the money is coming from and what you want the annuity to achieve, rather than assuming a pension is your only option. This is where seeking advice could be valuable to get you the right product in the most efficient way.