Your annuity questions

Your annuity questions

We have answers below to some of the frequently asked questions.

The information is based on our understanding, as at March 2015 of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.

  • An annuity (also called a pension annuity) guarantees to provide you with a regular income for the rest of your life, in return for you paying over a lump sum from your pension fund to an annuity provider. The income is intended to take over from your earnings when you retire, but you can continue working and still have an annuity if you choose. Regulation changes mean that you no longer have to buy an annuity before you turn 75, but this may depend on the rules of your plan or the contract terms of your pension scheme.

  • There are a number of different ways to take an income from your pension fund. Within our annuities guide we have highlighted some of the benefits and things to consider for the most popular types of annuity, including a conventional annuity with level income, conventional annuity with changing income, with-profits annuity such as our Income Choice Annuity and unit-linked annuity.

  • The Retail Prices Index or RPI is a monthly indication of the average price changes to a particular 'basket' of consumer goods, and is used as a general indicator of price inflation. Some types of annuity are linked to the RPI with the aim of keeping pace with inflation. (Your income changes in line with the index). However if you choose this type of annuity and inflation is negative, your income may go down (unless you choose to protect against this).

  • You don't always have to take a retirement income when you reach the retirement age shown on your pension plan. You may be able to continue working full or part-time and make extra payments into your pension pot, or you can just leave your fund invested while you make a decision. The minimum retirement age is currently 55. You don't normally have to stop working to take income from your pension. However, you can usually take up to 25% of your pension fund as tax-free cash at the same time as when you buy your annuity. You may need to buy an annuity by age 75 but this will depend on the rules of your plan/contract terms of your pension scheme.

  • Whatever you decide to do with your pension, you don’t have to stay with us. If you choose to use your pension to provide an income, you should shop around. Depending on the choices you make, you may be able to get a higher income elsewhere, so it’s important you consider this.

    If you or your partner have a medical condition this could mean you are entitled to a higher income in retirement. Remember that you should shop around for your income and other companies may cover different conditions to us and may use different criteria - which means you could get more or less income elsewhere. More information on how to shop around can be found on the Money Advice Service website.

  • The main reason is that not all pension companies will give you the same range of annuities, options and income levels. The differences can be quite significant between different companies - and not all pension providers are annuity specialists.

  • Buying an annuity is only one way you can use your pension savings. Depending on your provider, you may now also be able to take your fund as a single or series of cash lump sums, transfer it to a draw down plan or choose a combination of these options. But you'll need to consider whether you can fund your retirement for the rest of your life and the impact of tax or charges on any decision that you make. Whatever you decide to do with your pension, you can still take up to 25% of your fund tax-free.

    You should also shop around, as you may be able to get a higher income elsewhere. More information on how to shop around can be found on the Money Advice Service website.

  • Although most people decide to take the tax-free cash allowable from their pension fund up front (up to 25%), you don't have to. You can take the 25% tax-free cash from your pension, either in one lump sum or as a portion of any money that you take from you fund*. Any withdrawals in excess of the 25% tax free cash will be taxed as income at your marginal rate. So, any money you draw from your pension will be added to any other income you receive – your salary or state pension for instance. This could push you into the higher or even top rate of income tax. Tax rules therefore require careful consideration and you should speak to a financial adviser on this subject.

    * If you want to take more than the 25% tax-free cash from your fund in one go you must turn the rest of your pot into an annuity, drawdown or cash, subject to tax. A mix of these options may also be possible - please check with your pension provider.

  • Drawdown enables you to keep your money invested and take out an income in the meantime. You can take as much money as often as you want but there'll be a charge every time you withdraw money. You should think about how much you take out every year and how long you want your money to last as there is no guarantee that this will fund your retirement for the rest of your life.

    With drawdown, you can invest your money in a range of funds and you can move your money around if you want to. However, if these funds perform badly, and/or you take too high an income, your pension fund will be reduced. Annuity rates may also fall by the time you want to buy one. Drawdown is more complicated and is riskier than buying an annuity, so you might find it helpful to discuss with a financial adviser. (There may be a charge for financial advice.)

  • Once set up, the majority of annuities cannot currently be changed in any way. This is why it is important to shop around and select the right annuity for you.

  • You may be able to combine your different pensions into one overall fund to maximise the type of annuity you can buy. This will depend on the pension scheme you have, so when getting annuity quotations, ask if you're able to combine your various funds. Alternatively you could use different pension pots in different ways as a result of the new pension rules, introduced in April.

  • You can save in a company or personal pension at the same time and there is no limit on the number of schemes you can invest in. However there is a maximum amount that your combined pension pots can be worth without an additional tax charge. The government limits the amount you can build up in all your pension plans before incurring a tax charge. This is called the Lifetime Allowance. If you exceed this amount, currently £1.25 million for the 2015/16 tax year, a tax charge will be payable on the excess. If you think you are affected by this limit you can get more information from the HMRC website at www.hmrc.gov.uk. Alternatively, you may wish to speak to a Financial Adviser, for which you may be charged.

  • 'Recycling' is where a tax-free cash lump sum is withdrawn from a pension plan and then some or all of the money is re-invested into the same or another pension plan. This recycled contribution would then get tax relief as any normal contribution would do.

    There are rules and restrictions in doing this and we recommend you take financial advice before proceeding. Note there may be a charge for this.

  • Your income will be paid in regular instalments. You can normally choose to be paid monthly, quarterly, half-yearly or yearly, and in advance or in arrears. Whatever the frequency, you'll get the highest income if you can be paid in arrears (at the end of the period).

  • Annuity income payments are treated the same way as income you earn while working when it comes to tax. If you are a United Kingdom basic rate taxpayer, you will be taxed at the rate of 20% on your annuity income for the tax year to April 5, 2016, subject to your personal allowance. For more information please visit http://www.hmrc.gov.uk/rates

  • If you would like to have the peace of mind of knowing your loved one will continue to receive an income after you die, you will need to select a 'joint-life' option or a 'payment guarantee period' when you buy your annuity. Some of our customers who have bought an annuity told us they regret not doing this, so please consider this carefully.

    More on the joint-life option

    You can choose for an income to be paid to your loved one after you die. This can either be the full amount or a percentage of the income you receive. The higher the percentage you choose to leave your loved one, the lower your own starting income will be. You can usually choose this option to provide for your spouse, civil partner or a dependant.

    You'll find more information on the payment guarantee period option below. Note that if you don't select either of these options, then your income will stop when you die.

  • In addition to being able to purchase an annuity on joint-life terms, you could also choose a payment guarantee period. This means that your annuity will be paid for a minimum number of years even if you die. With this option you will receive a lower starting income than an annuity without a payment guarantee period. Your annuity income can be set up with a guaranteed term of up to 10 years with us.