Buying a pension annuity converts the money you have saved in your pension into a regular income. Annuities give you the security of knowing that you will always have an income and not outlive your pension savings.

If you have a private pension or ‘money purchase’ company pension you’ll be able to take some of the cash you’ve accumulated as a tax-free lump sum, typically up to 25%. All or part of the rest can be used to buy your annuity.

Conventional and enhanced annuities will guarantee you an income for life while investment linked, fixed term or temporary annuities can increase or decrease your funds.

What you need to know…

  • You can buy a conventional annuity from the age of 55
  • Rates vary by annuity provider and on other factors such as the size of your pension fund, age, health, lifestyle choices and even postcode
  • Shopping around could increase your income by up to 60%*! You can buy an annuity from anywhere, not just your current pension provider
  • You can buy an annuity with your whole pension pot, or just a percentage of it
  • It’s important to consider all choices, not just the highest rates, to ensure your annuity suits your circumstances
  • You can guarantee an income to continue for your spouse when you are no longer around
  • Income can increase with inflation or remain constant and you can receive payments monthly, quarterly, half-yearly or yearly.
  • You can guarantee an income for up to 30 years even if you are no longer around!

Don’t make a very expensive mistake…get up to 60% more income by shopping around*

If you’re worried that it’s complicated and time-consuming Key can do all the hard work for you and we’ll tell you if any of the small print on your policy means that you’d be better off staying with your current provider.

*Based on Key’s average customer Q1-Q3 2015 – male, single, aged 63, fund value £52,266. It depends on your individual circumstances if you are able to achieve the increases above.

Types of annuities

You can, prior to the purchase of an annuity, take the tax free cash from your funds, typically up to 25%. The balance, or part of it, can then be used to purchase an annuity and provide the lifetime income. Any income generated is taxed as earned income. The income received is added to any other income and is taxed accordingly.

Conventional annuity

Conventional pension annuities (or compulsory purchase annuities) can only be purchased with the proceeds of a pension plan.

Once purchased, the level of retirement income is guaranteed to continue throughout your lifetime.

There are options to consider within this form of annuity, including a joint, guaranteed or inflation linked annuity.

A Key Retirement options adviser will be able to advise on your options.

Investment linked annuity

An investment linked lifetime annuity usually provides an income for life with the potential for a rising income.

The level of income is linked to underlying investment performance. Whilst the level of income can increase, based upon the investment performance, the level of income provided can also fall. Usually the income can only fall to a minimum level often referred to as a minimum income guarantee.

Investment linked annuities are investments. As with any investment, the value of your fund can go up or down and may be worth less than what you paid in.

Enhanced annuity

You don’t have to have severe medical conditions to reap the benefits of enhanced rates. There are over 1,000 qualifying health conditions!

Even lifestyle conditions like being overweight, being a smoker or drinking habits may mean you qualify. Any past or present health conditions are all taken into consideration. The more serious the condition the higher the retirement income could be.

Comparing annuities

There are a number of different options to look at when comparing annuities that determine how much income you will receive and how often.

DescriptionMeaning
Tax-free cashWith most pension plans if you convert your pension savings you have the option to take up to 25% as a tax-free ‘lump sum’, the rest is taxed at your marginal rate. Alternatively you can add this sum to your annuity to provide a bigger income for life.
Spouse’s pension (Joint life)You can guarantee an income to your spouse, civil partner, or a dependant for the rest of their life after you die with a joint life annuity.
Health and lifestyleIf your lifestyle or your health could reduce your life expectancy you may be able to benefit from an enhanced or impaired life annuity which pays a higher income.
Guarantee periodYou can guarantee your annuity for a specific number of years even after you’ve passed away. This will give you a lower level of income, but guarantees that your beneficiaries continue to receive an income, if you pass away within the guarantee period.
Payment frequencyYou can choose how often you want to receive your income: monthly, quarterly, half-yearly or yearly. You can also choose when the money goes into your bank account – at the start (in advance) or the end (in arrears) of each period. Being paid ‘yearly in arrears’ will give you the highest annual income, as this gives the provider company more time to invest your funds. ‘Yearly in advance’ will provide the lowest annual income.
Inflation protectionYou can decide whether your annuity will pay a fixed income (which will decrease your purchasing power over time due to inflation),or one that increases annually to protect you against inflation.
Value protectionSome providers offer the option to allow you to protect a percentage of your purchase price if you die. You can choose to protect up to 100%. On death the provider will make a payment equal to your chosen percentage of purchase price less any annuity payments already made to you. The payment on death is age dependent. If death occurs before age 75 then the lump sum paid is completely free of tax. After age 75 the exact treatment is at the highest marginal rate of 45% on any withdrawals.

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