What is a Guaranteed Income (annuity)?

This is a guaranteed, regular income that will last for the rest of your life. If you’re worried about running out of money when you retire then this could be a sensible choice for you.

What is guaranteed income?

You use your pension fund to buy an income from a provider of your choice and in return you’ll get an income for as long as you live.

A guaranteed income can offer some financial security for life and a wide range of choices. You can build in options to help you find a retirement solution that’s right for you. But remember, adding more options will reduce your income and you won’t be able to change your mind later.

Shop around and switch providers to get the best deal. If you don’t, you could miss out on a higher income in retirement.

You can also choose to take a tax free amount before you buy a guaranteed income. The first 25% of your pension pot is normally tax-free.

What is guaranteed income good for?

Here are some of the advantages of taking a guaranteed income:

Guaranteed income for life – You’ll get peace of mind knowing that you’ll have an income for the rest of your life.

Stay in line with rising prices – You can choose a guaranteed income that increases each year, which may mean you can keep up with the rising prices of goods, giving you a better chance of a comfortable retirement.

Get greater income for poor health – If you smoke or have health issues you could qualify for a greater income.

Provide for your loved ones – You could choose a guaranteed income that allows you to provide for your partner should they outlive you.

Guaranteed payments for a set period of time – You could choose an income that has a guarantee period. This means the income will be paid until the end of the guarantee period, even if you die before then. A guarantee period can be up to 20 years.

What do I need to think about?

Shop around – If you want to, you can shop around to see whether any other provider will offer you a better deal. You don’t have to buy your guaranteed income from the company that your pension plan is invested with. The Open Market Option allows you to use your pension plan to buy a guaranteed income from any provider and you might get a higher income.

Once you set up your guaranteed income you won’t be able to change providers, cash it in or add different options. If you haven’t chosen to upfront then you won’t be able to leave any income to your partner so you have to get the decision right first time.

Support family – If you choose a guaranteed income for two your partner will normally receive payments free of income tax if you die before age 75. If you die after age 75, payments to your partner will normally be subject to income tax.

Remember though, the more options you add, the lower your income will be.

Cost of living – Inflation can reduce the effective value of a guaranteed income that's not increasing - due to rising prices of everyday items and bills.

State benefits – Your entitlement to means-tested state benefits, if applicable, may be affected if you take cash or income from your pension - check this isn’t going to be a problem before going ahead.

How could I use a guaranteed income?

You have the freedom to choose how you take your pension. You can take a guaranteed income on its own or you could blend by taking a mix of options to find the right fit for you.

Example: You could start with a flexible income. This would give you more flexibility in the earlier years of your retirement then as you get a little older you could buy a guaranteed income. This would give you a guaranteed income for the rest of your life allowing you to relax and enjoy retirement in the knowledge that you have a secure income.

Or, you might decide that taking a mixture is best for you. You could use some of your pension savings to secure a guaranteed income to cover the essentials such as bills and living costs then use the rest to cover life’s extras.

Taking a flexible income and guaranteed income could offer a good balance of peace of mind and the flexibility to adapt to life’s changes.

A flexible income arrangement may not be suitable for everyone. As part of your pension is actively invested, you’ll have to be comfortable taking the risk that if investments don’t perform well enough they won’t be able to sustain the amount of income you need. You could even lose it entirely.

Flexible income

Flexible income, or drawdown, gives you the freedom to choose your own level of income and the flexibility to suit your personal needs.

What is flexible income?

Take cash from your pension

Withdraw cash lump sums from your pension whenever you like. The first 25% is normally tax-free.

How do I take cash from my pension?

Why leave it for now?

You don’t have to take money out of your pension straight away. You could benefit from leaving your money where it is. However, your money remains invested and charges are still deducted. You could get back less than you leave in.

Read how you could benefit

The amount of income you receive depends on a number of factors - including; the type of guaranteed income you choose; your age; how much you have in your pot; the rates available and which features you choose to add on. Remember, the more options you add, the lower the starting income you’ll get.

You’ll also need to take a close look at your financial priorities. This will help you decide what type of guaranteed income is right for you.

Here’s what you need to do:

Review your pension

Some pensions have guaranteed annuity options which may give you more income than available on the open market.

Review your financial priorities.

This will help you decide what type of guaranteed income is right for you.

Decide what options you want to add

Example:

  • Do you want an income guaranteed for you, or guaranteed for two?
  • Do you smoke or are you in poor health? You could qualify for a higher income.
  • Do you want guaranteed payments for a set period of time?

Shop around

Check if another provider will offer you a better deal. You don’t have to buy your guaranteed income from the company that your pension plan is invested with. The Open Market Option allows you to use your pension plan to buy a guaranteed income from any provider and you might get a higher income.

Once you set up your guaranteed income you won’t be able to change providers or add different options. You won’t be able to make cash withdrawals or make payments and if you haven’t chosen guaranteed for two then you won’t be able to leave an income to your partner when you die. There are some helpful tools out there to help you make the right choice.

Seek guidance

It’s a good idea to seek appropriate guidance or advice to understand your options at retirement. You will have access to the Government’s free impartial Pension Wise service provided through Citizen’s Advice or The Pensions Advisory Service. This guidance can be accessed on the internet, by telephone or face to face. Their contact details can be found on the Contact us pages in the links provided.

You’ll need to make sure you choose a guaranteed income based on your personal situation so don’t be afraid to ask providers what they've done to get you the best deal. And bear in mind, some providers offer other options that aren’t described here so make the right choice now because you can’t change your mind later.

To sum up

Guaranteed income for life

You’ll receive a guaranteed regular payment for the rest of your life.

Stay in line with rising prices

By choosing a guaranteed income that moves in line with inflation you can ensure that your money stays in line with the rising prices of goods.

Get more income for poor health

If you smoke or have health issues you could qualify for a higher income.

Provide for your partner

Choose a guaranteed income that allows you to provide for your partner should they outlive you.

Guaranteed payments for a set period of time

You could choose an income that has a guarantee period.

Lump sum payout

Depending on how you set up your guaranteed income and who provides it, a lump sum payout could be paid when you die.

Tax-free cash

You can normally take 25% of your retirement savings as tax-free cash.

You can't change your mind

You won’t be able to change guaranteed income providers for a better deal once your income is being paid.

You won’t be able to make cash withdrawals

Extra options will reduce your income

Tax rules and legislation can change. Any information given is based on our understanding of law and current HM Revenue & Customs practice, as at April 2021. Your own circumstances including where you live in the UK also have an impact on tax treatment.

The information provided here should not be regarded as financial advice. If you are unsure you should speak to a financial adviser. There’s likely to be a cost for this.

Are you approaching retirement?

Access to impartial guidance

We recommend you seek appropriate guidance or advice to understand your options at retirement. If you are aged 50 or over, you can get free guidance over the phone or face to face with Pension Wise, a service from MoneyHelper.

Go to www.moneyhelper.org.uk/pensionwise or call 0800 138 3944.

MoneyHelper guides are also available at www.moneyhelper.org.uk

Retirement pathfinder tool

A quick and easy way to give you a snapshot of your options.

Protect against pension scams

The Pension Regulator (TPR) and the Financial Conduct Authority (FCA) have provided information to help people protect themselves from pension scammers.