How can I buy an income for life?
You can use money in your pension fund to buy an annuity. This provides an income that will be paid to you for the rest of your life. Most annuities are low-risk options, as your income is guaranteed – it can’t go down – and doesn't directly rely on investment returns.
There are other types of annuities available where your income can vary – some of these are detailed below.
Once you buy an annuity you can't generally change it or cash it in, even if your personal circumstances change.
Think about tax
Before you buy an annuity, you can usually take up to 25% of your pension tax free as a lump sum at the outset, although this will reduce the amount of money you can use to buy an annuity.
Once your annuity is up and running, income you receive from it will be taxed at your marginal rate on the income you get from it. Your tax position depends on your individual circumstances – and you should remember that tax rules can change in future.
When you set up an annuity, you can choose to include payments (either as a regular income or one-off lump sum) to your spouse, civil partner or dependant after you die. Choosing to do this will affect the amount you’ll get from the annuity yourself.
How you might get a higher income
You may get a higher income if you have (or have had) certain medical conditions or lifestyle factors which could affect your life expectancy, such as diabetes – but make sure to check this with your provider first.
With a lifetime annuity, you have several options to choose from, that take your personal needs into account. These include:
- Escalating income – You can arrange for the income you receive to increase over time by a fixed percentage.
- Inflation-proof income – Your pension will increase in line with inflation (as measured by the Retail Prices Index) each year for the rest of your life.
- Guaranteed period – Your annuity provider can pay an income to your dependent for a period after your death.
- Value protection – You can protect part or all of the funds you used to buy the annuity. If you die before this amount has been paid to you, the difference will be paid to your estate or dependants.
Usually, the more options you add, the lower your retirement income will be. Remember that inflation will reduce what your money can buy in the future. If you die in the early years of your plan, the total income you’ve received may be less than the pension used to buy the annuity.
You don’t have to buy an annuity from your pension provider. Different providers may offer different types of annuity, and the amount of money you get will vary depending on which provider you buy from. We recommend you shop around first, so you know that you’re getting the best possible deal.
Other types of annuities include:
- Investment linked annuities -Your pension goes into investments such as stocks and Shares/equities, giving your retirement income the potential to grow, although the income you get could go down as well as up.
- With Profits annuities - Your pension is invested in a company’s With Profit fund and gives your retirement income the potential to grow, although the income you receive is not guaranteed and could go down as well as up.
- Fixed term annuities – Instead of buying a guaranteed income for life, you can use money from your pension funds to buy a retirement income for a set number of years.
Pension Wise has been set up by the government and offers free and impartial guidance for people retiring with defined contribution pensions. It will help you understand what your choices are and how they work.
You'll be able to get help on the Pension Wise website, over the phone or face to face.
If you are approaching retirement we recommend you get guidance or advice to help you understand your options.
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