Otherwise known as a lifetime annuity, a pension annuity pays a guaranteed income for your life from the funds you have built up in your pension plan. Your annuity provider will pay you a regular income taxed in the same way as earnings.
The amount of income payable is dependent on your age and health, the size of your pension fund, economic factors, the type of annuity and the options you select.
You should also be aware that once you have purchased an annuity you cannot cash it in or make changes to your selected options. Also, an annuity must be purchased using funds from your uncrystallised rights held in a money purchase pension or from drawdown funds.
Some annuity providers offer annuities which pay you a higher than normal income if you have a medical condition(s) which can affect your normal life expectancy. These are called impaired life annuities. An enhanced annuity may be available if you smoke regularly, are overweight, if you have followed a particular type of occupation or live in certain parts of the country.
Annuities can be set-up to be single-life or joint-life. A joint-life last survivor annuity pays out until the second life dies, normally so long as financial dependency can be proven with the second life. Single life on the other hand is just that – it pays to a single life and dies with that person.
You can normally select at outset how often you want to receive your income payments from an annuity. Most people choose monthly, but you can be paid quarterly, half-yearly or annually. Also, income can be paid in advance or in arrears.
You can also decide whether the annuity should be level, escalating or decreasing:
Pension annuities allow for fixed and guaranteed income and whilst this does not provide any flexibility, it does provide safety.
Past performance is not a reliable indicator of future results