Annuity Guidance

Having saved through your working life into a pension, using this pot to provide an income in retirement is called buying an annuity. It is a one off purchase and cannot be undone once complete and therefore you need to provide the highest possible income so that you are able to do all the things that you planned in your retirement.

There are a number of things that you should consider before making the commitment as once the annuity is in place you cannot make any changes.

We recommend you contact Pension Wise. Pension Wise is a free and impartial service that you can access online, telephone or face to face.

Do I need to take my pension now or could I defer it?

By deferring your pension you could give your fund the opportunity to grow further. You could continue to make contributions, enhancing the value upon which your final pension will be calculated. When you come to vest your pension, you will be older, which means your life expectancy will be lower and your health could deteriorate which may mean your income would be higher. Annuity rates are presently at an historic low and they could increase, providing a higher income, but they could also go down. Taking all this into account the biggest factor in the deferral decision is, if you postponed the purchase of your annuity now, you would have forgone the income during this deferment. How long will it take to for the deferred annuity to catch up the income you would have received if you took it now? It’s often longer than expected and you can do your own calculations here:

Should I take the maximum tax free cash?

Most people take the maximum tax free cash. This money can be used to take that special holiday that you planned once you retired or it could be used to settle any outstanding debts so you can enter retirement with the peace of mind of knowing that any expensive financial commitments had gone. It is often used to invest in other more tax efficient ways to increase your income, although this will have the effect of reducing your income from your annuity by the percentage that you take as tax free cash.

Once you have taken your tax free cash any money you take will be taxed as income. This will be added to any other taxable income you receive. It may push you into a higher tax bracket.

Trivial Commutation

If the total of all your pension funds is not more than £18,000 you can take it all as a cash lump sum rather than taking an income. This is known as trivial commutation. You must be aged 60 or over, and you must do it within a 12-month period. One quarter of the lump sum will be tax free and the rest is taxed as income. If you have any defined benefit schemes to include in your commutation calculation, then the annual income from these should be multiplied by 20 to calculate their capital value.

How will my health affect my income?

For more than a half of all retirees your health and lifestyle can have a positive effect on the income you receive from your annuity. The greater increase on your likely morbidity the greater likelihood that you can increase your income by as much as 60%. No one will receive a lower annuity than the standard level – even if they are in excellent health with high family life expectancy, so it’s always worth including as much information as possible about your health and life style.

Should I opt for a guarantee?

Once your capital is invested it is cannot be retrieved even if you were to die soon after retirement. Therefore you may want to consider having your payments guaranteed for a period of time, generally 5 or 10 years. Although this can provide an income to any dependants, it should not be considered a substitute to that of a dependant’s income which gives greater security. If you have chosen a plan which doesn't pay out on your death, the income payments will stop when you die. No payments will be made to your dependants even if you die shortly after the plan is set up.


Should I include my spouse?

You may want to see that your loved ones receive an income in the event of your premature death. This can be built into the contract at the outset and often the dependant’s income is set at 100%, 2/3rds or a half of the income received by you. This will ensure that your loved ones can continue to enjoy the lifestyle that they are accustomed to. The inclusion of this benefit though can have a significant impact on your initial and continuing income.

If you have chosen a plan which doesn't pay out on your death, the income payments will stop when you die. No payments will be made to your dependants even if you die shortly after the plan is set up.

Should I include escalation?

Escalation of your income is a way to protect the buying power of your pension whilst it’s in payment. Without it the impact of inflation will have a significant detrimental effect on you maintaining your lifestyle. Including this option will have the effect of reducing your initial income to allow for its increase during the following years. Escalation can be by a fixed amount or linked to Retail Price Index and you must decide at the outset of the contract.

What is the effect of the frequency of payment?

Payment of the annuity in most cases is paid monthly in arrears to emulate the income you have received during your working life. The frequency of payment though can have an effect on the level of income you receive, for example annually in arrears will give you the highest income, whereas the opposite will apply for annually in advance. The inclusion of “Proportion” benefit and “Overlap” will also have an effect on the income you will get.

Are you aware of Investment Scams?

Investments scams are desgined to look like genuine investments. You should be extra vigilant with the money you are taking from your pension pot as fraudsters may be trying to access your money. Make sure you are dealing with a reputable firm and protected by the Financial Services Compensation Scheme.

Are there any penalties for taking money from your existing pension pot?

You should consider if there are other routes which mean you dont need to pay fees or penalties.

Does your existing pension plan have any valuable benefits or guarantees?

You may lose benefits when you access your pension pot. Please make sure you understand the benefits of any features you are ceasing.

Flexibility to withdraw lump sums from my pension

When your annuity has started you will not be able to cash it in or dip into it to withdraw lump sums. If you want the flexibility to access your pension pot in this way then an annuity will not be right for you.

I receive means tested state benefit will this be affected?

If you are claiming Means tested benefit you should check how this might affect you before you instruct to take money from your pension pot. Your benefits may be reduced or stopped if you have assets or income above a certain level.

Means tested benefits include, council tax deductions, income support, Universal Credit, housing benefit, income-based jobseeker's allowance and any benefit that pays for long term care.

I have outstanding Debt, will my pension pot be avaliable to creditors?

Once you have released money from your pension pot it may be avaliable to your creditors in the event you fail to keep up your payments with them.