Is a guaranteed income right for me?
Want peace of mind that you won’t run out of money when you retire? A guaranteed income, also known as an annuity, could be a good choice for you. Use your pension savings to buy a guaranteed income from a provider of your choice and get money every year for as long as you live.
The amount of income you'll get can depend on a number of things, including your age, where you live, your health and lifestyle, the size of your pension pot, the type of annuity you've chosen and annuity rates at the time.
What are my guaranteed income options?
You can build in options for a retirement solution that’s right for you:
- Stay in line with rising prices
By choosing a guaranteed income that moves in line with inflation you can ensure that your money stays consistent with the rising prices of goods, giving you a better chance of a comfortable retirement.
- Get higher income for poor health
If you smoke, have a particular lifestyle factor, are on medication or have a medical condition you could qualify for a higher guaranteed income (enhanced annuity). These tend to pay a higher income because they expect to pay out over a shorter time.
- Provide for your loved ones
You could choose a guaranteed income that allows you to provide for your partner, dependant or other nominated beneficiary should they outlive you. This normally provides a lower level of income as it's designed to pay out for longer.
- Guaranteed payments for a set period of time
You could choose a guaranteed income that has a guarantee period. This means the annuity will be paid until the end of the guarantee period, even if you die before then.
- Lump sum payout
Depending on your choice of guaranteed income, a lump sum payout could be paid when you die.
Remember, adding more options will reduce your starting income and you won’t be able to change your mind later.
What do I need to think about?
- Shop around
Check whether any other provider will offer you a better deal. You don't have to buy your annuity from the company that your pension plan is invested with. This could improve your retirement income as annuity options and rates may vary between providers. Once you set up your annuity you won’t be able to change providers, cash it in or add different options so you have to get the decision right first time.
- Support family
If you choose an annuity that continues to provide after you've died, your partner will receive payments, which are normally tax-free, if you die before age 75. If you die, age 75 or older, payments to your partner will be subject to income tax.
- Cost of living
Inflation can reduce the effective value of a guaranteed income 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. For more information visit the Money Advice Service website.
What else can I do?
You have the freedom to choose how you take your pension. You can take a guaranteed income on its own or you can take a mix of options to find the right fit for you. Let’s look at some examples:
- Balance of peace of mind and flexibility
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.
- Change to a guaranteed income anytime
For example, you could start with a flexible income (drawdown), to give you more flexibility in the earlier years of your retirement. Then later on, for example age 77, you could buy an annuity. 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.
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.
With a flexible income arrangement, at least part of your pension is actively invested and there is a risk that if the investments don’t perform well, they won’t be able to sustain your required income.
The level of guaranteed income to be purchased in future may be lower than is available now - due to changes in annuity rates etc.
The example shown is simply an option and should not be regarded as financial advice. The right option will depend on your personal circumstances. If you are in any doubt speak to a financial adviser. There is likely to be a cost for this.
Make sure you choose a guaranteed income based on your personal situation and don’t be afraid to ask providers what they've done to get you the best deal. And bear in mind, some providers offer other options that aren’t described here so make the right choice now because you can’t change your mind later.
To apply for a guaranteed income call 0345 279 8897
Call charges will vary.
Tax rules and legislation can change and your tax treatment will depend on your personal circumstances. Any information given is based on our understanding of law and current HM Revenue & Customs practice, as at April 2018.