An annuity is a type of retirement income product that you buy with some or all of your pension pot. It pays a regular retirement income either for life or for a set period.
- Annuities – the basics
- Higher income for medical conditions or unhealthy lifestyle
- Your other retirement income options
Annuities – the basics
Annuities are retirement income products sold by insurance companies.
They include:
- Lifetime annuities – which pay you an income for life, and will pay a nominated beneficiary an income for life after you die if you choose this option; they include basic lifetime annuities and investment-linked annuities
- Fixed-term annuities – which pay an income for a set period, usually five or ten years, and then a ‘maturity amount’ at the end that you can use to buy another retirement income product or take as cash
When you use money from your pension pot to buy an annuity you can take up to a quarter (25%) of the amount as tax-free cash.
You then use the rest to buy the annuity and the income you receive is taxed as normal income.
How much retirement income you will get from an annuity – and for how long ,will depend on:
- Your health and lifestyle
- How big your pension pot is
- Annuity rates at the time you buy
- Where you expect to live when you retire
- Where you expect to live when you retire
- How old you are when you buy your annuity
- Which annuity type, income options and features you choose
Once you buy an annuity you can’t change your mind, so it’s important to get help and advice before committing to one.
To find out more about the different annuity types – and the different options and features you can choose when buying them – read our guides below.
You’ll also find information on where to get help and advice and how to shop around for an annuity.
- Read our guide on Using your pension pot to buy a lifetime annuity
- Find out more information on Fixed-term annuities
Higher income for medical conditions or unhealthy lifestyle
If you have a medical condition, are overweight or smoke, you might be able to get a higher income by opting for an ‘enhanced’ or ‘impaired life’ annuity.
Not all providers offer these so be sure to shop around if you think you might benefit from one.
Your other retirement income options
An annuity is just one of several options you have for using your pension pot to provide a retirement income.
This article is provided by the Money Advice Service.
