Buying a guaranteed income (also called an ‘annuity’)

You can normally take up to 25% of your pot as tax-free cash and use the rest to buy an annuity to provide you with a guaranteed regular income.

You can either buy a guaranteed income that will last for your lifetime, or one that will last for a fixed period.

There's lots of other options to think about too – and how much income you're offered will depend on which options you choose.

How does a guaranteed income work?

How much guaranteed income can I get?

What income you’ll get depends on:

  • your circumstances, like your age, health and lifestyle
  • the amount of money in your pension pot
  • annuity rates
  • and the options you choose.

Different types of guaranteed income

There’s various different types of guaranteed income, and a range of options to choose from when you set it up. Some of the benefits, like continuing to pay an income to your partner after you die or choosing an income that increases each year for example, could mean you’re offered less income per month.

So it’s important to weigh up how important each option is to you, against the effect it will have on your income amount.

Choosing the right guaranteed income for you

For example, when choosing which options you want your income to include, you’ll need to think about…

…whether you want a guaranteed income for the rest of your life, or just for a period of time more

If you choose: lifetime

Pays a guaranteed income for the rest of your life


If you choose: fixed term

Pays for a set number of years – you choose how long (normally anything between 3 and 25 years). And you can choose whether you just want to buy the income for that amount of time – or if you want to pay a bit extra and get a ‘maturity amount’ (a lump of money) when the fixed term ends too.


 
If you choose a fixed-term income, you might be offered a higher amount. But you’ll need to think about what money you’ll live off after that period of time has passed

…whether you want your partner or loved ones (called your ‘beneficiaries’) to get an income after you die as part of the agreement – or if you’re happy for the payments to end when you pass more

If you choose: single life

The income payments end when you die.


If you choose: joint life

Payments continue to your partner/beneficiary after your death. You can choose whether you want their income payments to stay at the same amount yours were, or if you want them to get a different income amount.


 
If you choose to provide an income for your loved one(s) after your death, you might get a lower amount. But if you leave money to a loved one outside of a pension, they may have to pay inheritance tax.

More about what happens to your pension savings when you die

…whether you want the added security of knowing that your income is guaranteed to carry on paying out for the next few years, even if you die within that time more

If you choose: income with a ‘guaranteed period’

Income is guaranteed to be paid, as agreed, for a set period of time after you set it up – usually for anything between 5 and 10 years (but some providers offer up to 30 years). If you die within the agreed time, the income payments will carry on but to your beneficiary instead of yourself.


If you choose: value protected (also known as capital protected)

Pays your beneficiary the amount you paid for the guaranteed income, minus any income already paid to you, on your death.


 
If you chose an income with one of these guarantees, you might be offered a lower amount. But if you don’t have a guarantee on your income (or a joint life option) – your payments will stop when you die. That means if you do die earlier than expected, the money you spent on your income could end up being more than the amount of income you were paid.

…whether you want your income payments to go up as time goes on – or whether you’re happy for your payment amount to stay the same year after year more

If you choose: level

Income payments stay the same year after year, for as long as your guaranteed income agreement lasts.


If you choose: escalating

Income payments increase each year to reduce the effects of inflation.


 
If you choose a level income, you might be offered a higher income amount to begin with. But over time, you’ll be able to buy less with your income payments. This is because the price of things like food and household bills will go up over the years due to inflation – but your payment amount will stay the same.

…whether you want other factors, like your health or the performance of investments for example, to be taken into consideration when agreeing your income amount more

If you choose: impaired life (also called ‘enhanced’)

Pays more income for people with certain health or lifestyle conditions.


If you choose: investment linked

The income amount can change depending on how investments are performing.


 
If you’re in ill health or you smoke for example, you could be offered a higher amount if you choose an impaired-life income. So it’s the only time it pays to be ill! Make sure you disclose all of your medical conditions to your annuity provider – you could be better off. You won’t be penalised for medical conditions like you would be with a life insurance policy for example, it’s actually the opposite – the worse your health is, the more income you could be offered.

These are some examples of the main options you’ll want to consider if you’re thinking about buying a guaranteed income. But there are lots of other options and different types of income too. So we recommend you do your own research and shop around on the Pension Wise website…

Compare different types of guaranteed income (‘annuity’) with Pension Wise

Shop around and compare pension companies with Pension Wise 

Things to think about if you're...

Buying a guaranteed income ('annuity')

Does The People's Pension offer this option?

No

We don’t offer a guaranteed income or annuity product. But you can transfer your pension savings out to another provider who does offer a guaranteed income if you want. If you’re planning to use your pension pot to buy a guaranteed income with a different provider, you can move your pension savings with The People’s Pension into our Annuity Fund in the meantime. This means that your money will be invested in a way that’s designed to suit someone who is planning to transfer their money to an annuity provider in exchange for a guaranteed income in the future. More about your investment choices with The People’s Pension

Will I pay tax on the money I receive?

Will this option affect my tax relief if I want to continue saving into a pension?

Is the income guaranteed to last for the rest of my life?

Do I have any other choices once I've selected this option?

Can I leave money to someone when I die through this option?

Comparing with other providers

What are the risks?

How do I choose this option?

All your options at retirement Keep your money where it is Take it all in one go Take it a bit at a time Buy a guaranteed income or 'annuity'