Let’s Talk Money: What are annuities and how do they work?

Hi, I'm Allan Stratford, Advice Manager at Standard Life. My team help people on their way to and through retirement.

People often ask what annuities are and how they work.

Annuities have been around for thousands of years. Seriously, the Romans used to use them. 

These days, they're a way of taking money from your pension plan.

You can use part or all of your plan to buy an annuity. This'll give you a guaranteed income for the rest of your life, usually paid monthly.

You can buy an annuity from age 55, rising to 57 from 6 April 2028. 

The more money you use to buy an annuity, the older you are, and the higher the 'annuity rate' is at the time you buy, the more income you can get. Having health conditions or a particular kind of lifestyle could also get you more money.

Some annuity providers might offer more income than others, so it's important to shop around. And you can have a look online for this.

If you want, you could choose an annuity that rises over time or with inflation, and one that provides for loved ones after your death. 

You can usually take 25% of your plan tax free and buy an annuity with some or all of what's left.

Annuities can be subject to income tax.

Some people buy an annuity with part of their plan and keep the rest in 'drawdown'. That means the remaining money stays invested until you take it. Remember, the value of investments can go down as well as up and could be worth less than what was paid in. 

Some people buy an annuity with part of their plan, wait a few years, and then do it again, as they might get more money when they're older.