Pension annuity

What’s the difference between an annuity and a pension?

Annuities are a way of using your pension to give you an income in retirement. They pay you a regular guaranteed amount each year for the rest of your life - and you can buy one using the money from your pension. A pension is simply the account you pay money into for retirement - that's then invested in the stock market.

What’s the difference between drawdown and an annuity?

Drawdown and annuities are two different ways of taking money from your pension. An annuity gives you a guaranteed income for the rest of your life, which you’ll buy with an initial lump sum of money (normally from your pension pot). Learn more about pension annuities.

Drawdown lets you withdraw from your pension pot, which could be a regular amount or as and when you need it. There are higher risks with drawdown – as the money that’s left in your pot will still be invested, so its value could fall as well as rise – but also more flexibility. Find out about income drawdown.

Can I transfer or sell an annuity?

No, once you’ve set up an annuity, you can’t change, sell or transfer it.

What’s an enhanced annuity?

Like a regular pension annuity, an enhanced annuity pays you an income when you retire. However, it takes things which may change your life expectancy into account. These include some medical conditions, and lifestyle factors like whether you're a smoker and where you live.

What happens to an annuity when you die?

This depends on the decisions you make when you buy your annuity. There are different benefits that you can add to your annuity, like leaving money to someone who relies on your income. If you choose for your annuity to just pay out while you’re alive, it’ll stop when you die.

Can I leave an income for my spouse within my annuity?

When you set up an annuity, you can choose for it to provide an income for a particular person who depends on you financially when you die. You can also guarantee payments for a certain period of time even if you die during that period, or leave a cash lump sum if the annuity has paid out less than you paid for it. Once the annuity has been set up and your cancellation period has finished, you can't change it. These features will reduce the income that the annuity will pay.

What happens if I change my mind about buying an annuity?

You have 30 days from the date your annuity starts to change your mind and cancel your annuity. After this point, the annuity will continue for the rest of your life.

Will my annuity change with inflation?

When you buy an annuity, you can choose your income to be fixed at the same level, to go up by a set percentage over time, or to increase based on inflation. You may want to speak to a financial adviser before you make that decision. Having your annuity income increase with inflation will mean it starts lower and may take a number of years to match what you’d get with a level income annuity.

Find out how much guaranteed income you could get by using our pension annuity calculator.

How is an annuity taxed?

The income you receive from an annuity will be taxed in the same way as income from a job, known as Pay As You Earn (PAYE). You’ll normally get each payment after any tax has been taken off.

What’s a benefit crystallisation event?

This is when we test to make sure you’re being taxed correctly for the money you take from your pension. You may have more than one of these, and they’re triggered by certain events that happen in your life, such as turning 75 or taking an annuity.