With this option, usually after you’ve taken any tax-free cash, the remainder is used to provide you with a guaranteed regular income for the rest of your life. This income is subject to income tax. You can’t usually take single amounts after you’ve taken your tax free cash.
In a nutshell;
- You can usually take up to 25% tax free, but you'll need to do that at the start.
- You’ll get a regular income, which is guaranteed for the rest of your life and is subject to income tax.
- Unlike some other pension options, there’s usually no lump sum to pass on to loved ones after you die.
Benefits
- You'll get an income on a regular basis – so you know how much money you’ll have coming in.
- You’ll get payments for the rest of your life, so you’ll know they’ll always be there.
- If you choose a ‘joint life’ annuity that covers you and your loved one, you can usually pass on regular payments to them when you die. These will carry on for the rest of their life.
- You can choose a guaranteed period which means that it will keep paying out an income to a loved one for a set number of years after you die.
- If you, or your loved one has (or has had) certain health or lifestyle conditions, you could get a higher income through what’s known as an enhanced annuity.
Considerations
- Once you buy an annuity, you can’t change your mind after the cancellation period.
- You usually can’t leave a lump sum to your loved one.
- If inflation goes up, your money might not stretch as far (unless you’ve chosen an income that increases each year).
- Choosing some of the options – like a 'joint life' annuity, a guarantee period, or payments rising each year – would mean you get less income at the start.
- You might get back less than you paid in, depending on how long you live.
An example of using this option
Simon is 60 and is fully retired. At this stage in his life he’s looking for the security of a regular income and would like to use his pot to fund this.
He has a pot of; £50,000
He takes 25% tax-free cash as a lump sum; £12,500
The rest is used to provide a guaranteed yearly taxable income of; £1,700
Simon receives the full 25% tax-free cash of £12,500; and a guaranteed yearly income of £1,700 for the rest of his life.
Working assumptions:
Example is based on a 20% tax-rate and a Personal Allowance of £12,750 for 2022/2023. No other income is taken into consideration. When added to other income for the year, the amount of tax to pay could be at a higher rate.
The figures shown are for a single guaranteed income for life, paid in arrears and are based on age 60, pension pot of £37,500 and generic rates.
The actual amount you receive and the amount of tax you may need to pay will depend on the option you choose, the rates available and your individual circumstances.
The above illustration is not a real life example or recommendation.
Calculators and tools to help you plan
How much you could get from your pension
Our calculator will help you understand how the options could impact your retirement income. You can use it to understand what your pension pots can provide. It will also show you the buying power of your money by taking into account the effects of inflation.
Please read all of our assumptions to understand how we’ve worked out the amounts.
The results are not a recommendation and not financial advice.
How long your money could last
This planner shows you how taking different amounts of money from your pot can impact how long your money might last. You can input different amounts and see the impact it has.
Launch Retirement Income Planner
How tax could affect your income
This calculator will provide an estimate of how much Income Tax you may pay, depending on how much money you take from your pension. You can input different amounts in the box that asks for your gross salary and see roughly how much tax you might have to pay.
Launch Income Tax and Tax Relief calculator
How much Emergency Tax you might pay
This tool is to show you how much Emergency Tax you might have to pay on withdrawals from your pension pot.
Important Q&As
No. You can usually choose to mix your pension options, or do nothing at all. We would always recommend that you seek financial advice first.
Yes, unless you’ve selected a joint life option or one that carries on providing an income for a loved one after you die for a set period of years.
No, usually the Guaranteed income for life will not be passed on as a lump sum.
No, once you have decided to purchase a Guaranteed income for life, you can’t change to another option. There is usually an initial cancellation period though.
No you can choose to do nothing when you reach retirement age. If you are looking for the security of an income for life, then a Guaranteed income for life can usually be purchased at any point in your retirement.
This isn't always the case. It’s important to shop around for the best deal from a number of providers.
Other pension options
Take a combination of tax-free and taxable money
(also known as "take some or all your pension as cash")
Take tax-free money from your pension
(also known as "Flexible cash and income or Drawdown")
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