Annuities provide you with a guaranteed income for life in exchange for the funds you’ve built up in your pension.
It is possible to use just some of your pension fund to purchase an annuity and choose other retirement options with the remainder of your fund.
The amount of income you receive from your annuity will vary depending on a number of factors. Your health and lifestyle may mean you are eligible for an annuity offering higher payments so you should give your annuity provider all relevant information when buying an annuity.
You should also consider whether you wish to buy an annuity that will increase over time, or one which is worth more now, but which stays level or drops in value over time. If you choose a level or decreasing income you should consider that the amount you receive will become less valuable over time as a result of inflation.
It is important for you to shop around a range of annuity providers as this is likely to help you obtain a better value annuity.
Traditional annuities can be level or they can increase over time. Any increases can be at a fixed rate, or in line with an inflation measure. Traditional annuities are not permitted to decrease except for very limited, specific circumstances.
You can use your pension fund to purchase a traditional annuity that will provide you with an income for the rest of your life.
You can opt to have a dependant’s pension included, usually for your spouse, so the pension can continue to be paid to them if they outlive you. This can be at the same level, or at a reduced level, for example 50% of the pension paid to you.
You may also choose an annuity with a guarantee period of up to 10 years. If you die within the guarantee period then your pension can continue to be paid to your beneficiary until the end of the period.
Annuities are allowed to decrease as well as increase. If you choose this option then it will be stated in the contract when you start the annuity.
Choosing an annuity that decreases might be a good idea for someone who is expecting their income needs to drop at a later date, for example when they pay off their mortgage or start receiving income from the state pension.
If you purchase an annuity that allows decreases in income this will be classed as flexibly accessing your pension benefits and the amount you can contribute to your pension will be restricted. See our page on the money purchase annual allowance for more details.
These more flexible rules also allow guarantee periods for annuities to be longer than 10 years and for a nominee’s pension to be included, not just a dependant’s.
How is my annuity income taxed?
All annuity income is subject to income tax.
How do I purchase an annuity using my SIPP?
To start the process of buying a lifetime annuity – with us paying your tax-free lump sum – you'll need to log in to your account online and select 'Manage my SIPP' from the 'My account' menu.
Looking to transfer part, or all, of your SIPP to an insurance company to buy an annuity immediately, and want them to pay any tax-free lump sum? Please contact us for a transfer-out form.
What happens to my annuity when I die?
Under an annuity contract death benefits (if any) are in the form of a guarantee period or dependant’s/nominee’s pension. Once any guarantee period has expired and on the death of a dependant/nominee (if a dependant’s/nominee’s pension has been included), there will be no further death benefits.