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 February 2014 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. You can also defer buying an annuity when you retire and keep your money invested, but you must normally purchase one before you turn 75.

  • 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 buy an annuity 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 do this by age 75 depending on scheme rules/contract terms of your pension scheme.

  • The main reason is that not all pension companies would give you the same range of annuities, options and income levels. The differences can be quite significant between different companies. Also not all providers are specialists and some don't offer a range of annuity options.

  • This depends - if you are aged 60 and over and the total of all your pension funds is less than £30,000 (for the 2014/15 tax year) then you can withdraw it all as cash. However, only 25% will be tax free, the remainder will be taxed as earned income under PAYE.

    If the total value of all your pensions is more than £30,000 (for the 2014/15 tax year) then you must take an income with your pension fund. However with many pensions you can take up to 25% as a tax-free lump sum. (If taken this means you will receive about 25% less income when you purchase your annuity - after any fixed charges are taken into account.)

  • Although most people decide to take a tax-free cash sum from their pension fund up front, you don't have to. You could keep it invested and use it to buy a larger retirement income. However this may not be the most tax-efficient way to provide any extra cash flow you need, as the income payable through a personal pension or annuity is taxed. You may need to take a tax-free cash lump sum by age 75 depending on scheme rules/contract terms of your pension scheme and at the same time as when you buy your annuity.

  • 'Income drawdown' enables you to keep your money invested in your pension fund and take out an income in the meantime. There is a maximum amount of income that you will be able to take depending on your age and fund value.

    Income drawdown enables you to 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. Income 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 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.

  • 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 £1.5 million, for tax year 2013/14 and £1.25million for tax year 2014/15, a tax charge may be payable on the excess. If you think you are affected by this limit you can get more information from the HMRC website at . 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, 2014, subject to your personal allowance. For more information please visit

  • 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 pension annuity income can be set up with a guaranteed term of up to ten years

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