Annuities

Since April 2015, people with defined contribution pensions no longer have to buy an annuity. You can take money from your pension pot as and when you wish. Usually up to 25% can be taken tax-free (subject to a lifetime limit), and the rest is taxed as income. Many people still value the security of a guaranteed income they can’t outlive.

An annuity is a contract with an insurance company. You swap some or all of your pension pot for a regular, guaranteed income, either for life or for a set number of years. Your income depends on:

• your age and health
• where you live
• annuity rates when you buy
• the type of annuity you choose
• the size of your pot

• A secure, regular income for life or for a chosen term
• Can be tailored to your circumstances, for example with options for a partner’s income after you die, or yearly increases to keep up with rising prices

• Income depends on annuity rates when you buy, which can’t be predicted
• Payments normally stop when you die, unless you choose an option that continues to pay a partner or other beneficiary (which means a lower starting income)
• Most annuities can’t be changed once bought, so they’re less flexible than other options

The wrong annuity could cost you a great deal of income over time. Compare policies, rates, restrictions and benefits carefully, and consider financial advice before you commit. You aren’t obliged to buy from your existing pension provider, and shopping around can make a big difference to your income. Free, impartial guidance is also available from Pension Wise.

The value of pensions and the income they produce can fall as well as rise. Tax treatment depends on individual circumstances and may change.