Buying an annuity

A regular retirement income for the rest of your life

One way to use your pension pot is to buy an annuity. This gives you a regular retirement income, usually for the rest of your life. In most cases, this is a one-off, irreversible decision, so it’s crucial to choose the right type and get the best deal you can.

Until recently, most people with a defined contribution pension (based on how much has been paid into their pension pot – also known as a ‘money purchase pension’) used their pot to buy an annuity.

However, you can now access and use your pension pot in any way you wish from age 55.

You don’t have to buy an annuity from your pension provider; you can shop around on the open market to help ensure you get the best deal and options for you.

Decide on the type of annuity you want

Choosing an annuity is about more than getting the best value on the market. There are different annuity types (ones that pay an income for life – including basic lifetime annuities and investment-linked annuities – and ‘fixed-term’ annuities that pay an income for a set period).

Within these types, you have several options for how you want the income paid. It’s important to choose the right annuity type and income options for your circumstances and pension pot.

Higher income for poor health or lifestyle

If you have a diagnosed medical condition or poor lifestyle, you could qualify for a higher retirement income from an ‘enhanced annuity’. So don’t hide your health problems or unhealthy lifestyle. It pays to tell your provider – and other providers when shopping around – if, for example, you’re a smoker or have high blood pressure.

Check what your pension provider is offering

At least six weeks before your retirement date, your provider will contact you with:
• Details of the value of your pension pot
• An indication of the retirement income your pot would generate if you bought a basic lifetime annuity with it

It’s important to check whether your agreement with your provider includes a guaranteed annuity rate (GAR). These can be very valuable as they can offer much better rates than those generally available. A GAR might come with restrictions but can lead to a significant boost to your retirement income.

The retirement income that your current provider offers you is your starting point for finding out if you can get a better rate elsewhere.

Discuss your options

In most cases, choosing an annuity is a decision that will determine your income for the rest of your life, so it’s extremely important to make the right choice.

You should discuss your findings with a professional financial adviser before choosing an annuity.

The law and tax rates may change in the future. These details are based on our understanding of tax law and HM Revenue & Customs’ practice which is subject to change. The amount of tax you pay, and the value of any tax relief, will depend on your individual circumstances.