Guaranteed income (annuity) tips before you buy

If you've been paying into a personal pension during your working life, you'll have been building up a pension fund. There are various ways you can access this money from age 55. One of the options is to buy a guaranteed income for life (also known as an annuity). This is designed to provide you with an income for the rest of your life, no matter how long you live.

You might have also paid into a pension scheme with an employer - if this is the case you'll need to find out how to access this by contacting them directly. Unless you have a final salary (defined benefit1) pension scheme where you should automatically receive money as an annuity.

You're guaranteed to keep receiving an income for as long as you live.

There are a number of different types of guaranteed incomes for life. But what they all have in common is that you’re guaranteed to keep receiving an income for as long as you live. We've put together some tips to help you work through your options.

Things to think about

  • Fixed or flexible income? Your income options and needs - having an idea of what you want to do in retirement and what your financial needs may be will help you determine if you want a secure and regular income for the rest of your life or as an alternative retirement option, flexible income (also known as drawdown) gives you more flexibility with your pension savings by being able to access them as and when you want to.
  • What you'll need to buy in future - what you spend your money on in retirement may be different to your current needs. When choosing an guaranteed income option, it's important to consider the effects of inflation as it could reduce the spending power of your income in the future. Also, it's worth knowing it's possible to buy a guaranteed income which increases with inflation, but this will affect your starting income.
  • Compare the market - you can buy a guaranteed income from any provider, so you should shop around, and, depending on your circumstances, you may be able to get a higher income elsewhere.
  • When to buy - if you delay buying your guaranteed income when you retire, you won't necessarily get a higher income in the future because guaranteed income rates can go down as well as up. It may also mean that you're losing out on income that may take longer to recoup than any growth of your fund from leaving it where it's invested.
  • Your health - you or your partners health and lifestyle conditions could entitle you to a higher income. Different providers may also cover different conditions.
  • The type of guaranteed income you choose - if you want to provide an income for your loved ones after you die you should consider the options such as joint life or adding a guaranteed payment period, or you could do both.
  • The impact on any means tested benefits you receive - Housing Benefit, Income Support, or other benefits might be affected by the guaranteed income you buy.
  • Existing debts - if you have debts, any creditors could have a claim on the money you receive.
  • Check your original pension plan - before looking to buy a guaranteed income on the open market, check what's available under the standard terms of your pension. You may be entitled to a guaranteed annuity rate or guaranteed minimum pension which may provide a higher income.
  • Consider topping up your pension pots and/or combining your pension funds to buy a guaranteed income - this could give you a higher income when you retire - but the value could still go down as well as up whilst it's invested, so you may not get back the amount you put in. Combining funds could also impact on any guarantees you may have in place with your existing pension provider. 

Getting help to decide what's right for you 

We're not recommending a particular retirement option, or course of action, over another. 

For some products, like annuities, it’s important to shop around so you can get the highest possible income. Yours or your partner’s health and lifestyle can increase the amount of income you or your partner can get. Different providers might use different criteria to assess yours or your partner’s health and lifestyle conditions. This is known as an enhanced annuity. Prudential don't offer enhanced annuities but you might qualify for an enhanced annuity with another provider and get a higher income. That’s why it’s very important that you should shop around.

We recommend you use Pension Wise, a free, impartial guidance service offered by the Government to help you understand your retirement options. You can speak to them on 0800 280 8880, and book an appointment to meet someone in person. You can also speak to a financial adviser.

Be mindful that investment scams exist and so it's important to be vigilant and carefully check the facts before deciding what to do with your money.

If you're a member of an occupational pension scheme2, the options available to you may vary, so please contact your scheme provider.

1 A company pension scheme where the pension an employee receives is linked to their length of scheme service and size of their salary as defined in the scheme rules. They are often referred to as final salary schemes.

2 A pension scheme provided (sponsored) by an employer for its employees. Occupational pension schemes can be defined benefit schemes (final salary schemes) or defined contribution schemes (money purchase schemes).

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