Get a guaranteed income (annuity)

Overview

You can use your pension pot to buy an insurance policy that gives you a guaranteed income for the rest of your life. This is called an annuity.

  • You get a fixed income for life or for a set number of years.
  • You can take 25% of your pot as tax-free cash and buy an annuity with the other 75%.
  • You pay tax on your annuity income.

If you’re currently receiving a pension income it’s likely that you’ve already bought an annuity or are taking an income from a final salary or career average (defined benefit) pension.

Find out if you can book a free Pension Wise appointment.

Estimate how much your guaranteed income could be

£

How an annuity is calculated

How much income you get each year from an annuity depends on things like:

  • how much you had in your pension pot when you bought the annuity
  • your age
  • whether you want the income to increase each year
  • whether you want the annuity to pay out to someone after you die
  • your health and lifestyle

You may have to pay administration fees.

If the insurance company you bought your annuity with goes bust the Financial Services Compensation Scheme will cover you in full.

Types of annuity

There are lots of different types of annuity and you can shop around – you don’t have to buy one from your current pension provider.

Type How it works
Single life Paid just to you, either for life or for a fixed number of years.
Joint life Payments continue to your spouse or partner after you die.
Fixed term Pays an income for a set number of years, then a guaranteed sum which you can invest or use to buy another annuity.
Short term Stops paying at the end of a set number of years (up to 5 years) or when you die (whichever comes first).
Guaranteed period Pays out for a set term even if you die within that term, eg you get a 10-year annuity and die after 7 years, your spouse or partner still gets payments for another 3 years or a lump sum.
Enhanced or Impaired May pay more than a standard annuity if you smoke or have a medical condition, eg diabetes or high blood pressure.
Escalating The amount increases each year to reduce the effect of inflation.
Level Pays a flat amount of income each year.
Investment linked Tied to the stock market, the amount it pays can vary and depends on the success of the investments.
Capital protected Your pot is paid to whoever you leave it to (your ‘beneficiary’) if you die within a set period, subject to tax.

Once you’ve bought your annuity you only have a short period when you can still change your mind (in most cases 30 days). After that you can’t change the decision.

Tax

If you decide to buy an annuity you can still take up to 25% of your pension pot tax free as cash. This doesn’t use up any of your Personal Allowance – the amount of income you don’t pay tax on.

You could then buy an annuity with the other 75%.

You pay tax on income from an annuity, just like you do on your salary. This is because when you’re paying into your pension you get tax relief on your contributions.

If you take the 25% tax-free lump sum you must buy an annuity with the rest or use one of the other pension options.

Book a free Pension Wise appointment to find out more about what you can do with your pot.

Scams

Beware of pension scams contacting you unexpectedly about an investment or business opportunity that you’ve not spoken to them about before. You could lose all your money and face tax of up to 55% and extra fees.

Next steps

  • Ask your provider if your pension pot has any special features that could mean you get a better deal, eg a guaranteed annuity rate.
  • Ask your provider about the types of annuity they offer, eg if you’re in poor health you could get a better rate.
  • You can shop around and compare providers to get the best deal.
  • Understand how much tax you’ll pay on your annuity income.