What is a Guaranteed Income (annuity)?

You use your pension fund to buy an income from a provider of your choice and in return you’ll get an income for as long as you live.

A guaranteed income can offer some financial security for life and a wide range of choices. You can build in options to help you find a retirement solution that’s right for you. But remember, adding more options will reduce your income and you won’t be able to change your mind later.

Shop around and switch providers to get the best deal. If you don’t, you could miss out on a higher income in retirement.

You can also choose to take a tax free amount before you buy a guaranteed income. The first 25% of your pension pot is normally tax-free.

Here are some of the advantages of taking a guaranteed income:

Guaranteed income for life – You’ll get peace of mind knowing that you’ll have an income for the rest of your life.

Stay in line with rising prices – You can choose a guaranteed income that increases each year, which may mean you can keep up with the rising prices of goods, giving you a better chance of a comfortable retirement.

Get greater income for poor health – If you smoke or have health issues you could qualify for a greater income.

Provide for your loved ones – You could choose a guaranteed income that allows you to provide for your partner should they outlive you.

Guaranteed payments for a set period of time – You could choose an income that has a guarantee period. This means the income will be paid until the end of the guarantee period, even if you die before then. A guarantee period can be up to 20 years.

Shop around – If you want to, you can shop around to see whether any other provider will offer you a better deal. You don’t have to buy your guaranteed income from the company that your pension plan is invested with. The Open Market Option allows you to use your pension plan to buy a guaranteed income from any provider and you might get a higher income.

Once you set up your guaranteed income you won’t be able to change providers, cash it in or add different options. If you haven’t chosen to upfront then you won’t be able to leave any income to your partner so you have to get the decision right first time.

Support family – If you choose a guaranteed income for two your partner will normally receive payments free of income tax if you die before age 75. If you die after age 75, payments to your partner will normally be subject to income tax.

Remember though, the more options you add, the lower your income will be.

Cost of living – Inflation can reduce the effective value of a guaranteed income that's not increasing - due to rising prices of everyday items and bills.

State benefits – Your entitlement to means-tested state benefits, if applicable, may be affected if you take cash or income from your pension - check this isn’t going to be a problem before going ahead.

You have the freedom to choose how you take your pension. You can take a guaranteed income on its own or you could blend by taking a mix of options to find the right fit for you.

Example: You could start with a flexible income. This would give you more flexibility in the earlier years of your retirement then as you get a little older you could buy a guaranteed income. This would give you a guaranteed income for the rest of your life allowing you to relax and enjoy retirement in the knowledge that you have a secure income.

Or, you might decide that taking a mixture is best for you. You could use some of your pension savings to secure a guaranteed income to cover the essentials such as bills and living costs then use the rest to cover life’s extras.

Taking a flexible income and guaranteed income could offer a good balance of peace of mind and the flexibility to adapt to life’s changes.

A flexible income arrangement may not be suitable for everyone. As part of your pension is actively invested, you’ll have to be comfortable taking the risk that if investments don’t perform well enough they won’t be able to sustain the amount of income you need. You could even lose it entirely.

Tax rules and legislation can change. Any information given is based on our understanding of law and current HM Revenue & Customs practice, as at April 2022. Your own circumstances including where you live in the UK also have an impact on tax treatment.

The information provided here should not be regarded as financial advice. If you are unsure you should speak to a financial adviser. There’s likely to be a cost for this.