Take your pension as a guaranteed income: annuities explained

An annuity lets you convert some or all of the money in your defined contribution pension into guaranteed taxable income, either for: 

• the rest of your life – called a lifetime annuity 
• a fixed amount of time, such as five or ten years – called a fixed-term annuity. 

Once you’ve bought an annuity and any cooling off period has ended, you typically cannot change your mind. 

Our Annuity comparison tool will show you how much different providers would pay you, as rates often change.

You can also get quotes from: 

• your existing pension provider, if they offer annuities  
• insurance companies. 

For a very quick estimate, you can use our calculator.  

The income an annuity will pay you depends on:

• how much pension money you convert
• how long you’d like the annuity to pay out for (if it’s a lifetime or fixed-term annuity)
• if you want the annuity income to increase each year
• the rate an annuity provider will offer you, based on: 
  • your age, health and where you plan to live
  • the current interest rates and other market factors.

For example, if you converted a £100,000 pension pot, an annuity rate of:

• 5% would give you £5,000 a year
• 6% would give you £6,000 a year.

Income from an annuity is counted when working out how much Income Tax you’ll pay.

The annuity provider will usually calculate this for you using your tax code, so tax will normally be taken off before you’re paid.  

Before buying an annuity, you usually have the option to take up to 25% of your pension as a tax-free lump sum – as long as the total amount of tax-free cash taken from all your pensions is within the lump sum allowance (LSA). The LSA is £268,275 for most people.  

You do not have to take the full 25% as a tax-free lump sum, or any at all. The more you take, the less you’ll have to give you an income later.

Annuities have different features, so you need to make certain choices when getting quotes. 

You can choose between annuities that will pay you a guaranteed income for: 

• the rest of your life – a lifetime annuity 
• an agreed period between 1 and 40 years – a fixed-term annuity. 

If you buy a fixed-term annuity, you can choose to use up your entire pension pot or get a payment when the annuity ends – called a maturity amount.  

You’ll agree how much your maturity amount will be when you take out the annuity. This often includes the option of taking a lower annuity income so you get a higher maturity lump sum.   

You can spend a maturity amount in any way you like or use it to give you more retirement income. 

For example, you could use your maturity amount to: 

• take income as and when you need it, by putting it into in a pension drawdown product 
• buy another annuity. 

This might mean you can get a higher paying annuity as it’ll be based on an older age and health – but it all depends on the rates available at the time.  

If you die before your fixed-term annuity ends, your maturity amount is often paid to your nominated beneficiaries. But always check, as death benefits vary between schemes. 

You can choose for your annuity income to: 

• stay the same – called fixed or level
• go up every year – called increasing or escalating, either by:
  • a set rate, such as 3% or 5% 
  • in line with inflation, sometimes with an upper cap.

For example, after 10 years, a £200 monthly annuity would pay:

• £200 on a level term
• around £261 on an increasing term with a fixed 3% annual increase.

Fixed or level annuities will usually give you a higher income at the start than increasing. But an increasing annuity will help make sure your retirement income will keep up with the cost of living. 

You’ll be asked medical questions so annuity providers can estimate your life expectancy. This means you might be offered a higher income if you: 

• have a medical condition – like diabetes, high blood pressure or cancer  
• are overweight or smoke 
• had certain jobs – like manual labour  
• live in an area with low life expectancy. 

This is often called an impaired life or enhanced annuity. The annuity provider might ask your doctor for more information or for you to attend a medical examination.  

You can usually choose to get income from an annuity: 

• monthly 
• once, twice or four times a year. 

Your annuity can start paying out: 

• as soon as you’ve set up the annuity – called in advance 
• after your chosen payment frequency – called in arrears. 

For example, the first payment of a monthly annuity paid in arrears would be one month after you set it up. An annual annuity paid in advance would pay out immediately, with the next payment one year later. 

An annuity will usually stop paying when you die, unless: 

• you take out a joint-life annuity – this pays a portion of your income to your dependants after you die, and/or 
• you add one or more optional protections: 
  • value protection – this pays your beneficiaries a lump sum if your annuity has paid out less than it cost you when you die 
  • a guarantee period – this pays your beneficiaries an income for up to 30 years after you die, or a lump sum of that value 
  • ‘with proportion’ – this pays your beneficiaries a lump sum for the period between your last payment date and the day you died. 

For example, if you had value protection on a £50,000 annuity and only received £30,000 in income from it when you died, your beneficiary would receive £20,000.  

If you had a guarantee period for 10 years and died after 7 years, your beneficiary would either receive the remaining 3 years as a lump sum or as regular income.   

If you had ‘with proportion’ and died 10 days after your annuity had last paid out, your beneficiary would receive a payment for the annuity income payable for those 10 days.

You’ll need to choose any optional protections when you first take out the annuity. You’ll usually get a lower income for each protection you add on as it’s more likely the income will pay out for longer. 

If you choose a guarantee period and a joint-life annuity, you can normally choose for the payments to your beneficiaries to pay out: 

• at the same time, called overlap 
• after the guarantee period has ended, called without overlap. 

Just be aware that you might not always benefit from adding protections. For example: 

• a joint-life policy will not pay out if your dependant dies before you 
• your annuity will still stop if you die after a guarantee period has ended.     

Using your pension to buy an annuity lets you get a guaranteed retirement income, so you can be sure how much and how often you’ll get it. 

It also means that part of your pension cannot go down in value, as it’s no longer based on how well your invested money performs.  

But there are some potential downsides to consider too. 

When buying an annuity, you can normally choose to: 

• use all the money in your pension pot 
• take up to 25% as tax-free lump sum first and: 
  • use the rest to buy an annuity at the same time 
  • keep the rest invested and use some or all of it to buy an annuity – at the same time or at a later date. 

Remember, you do not have to take the full 25% as a tax-free lump sum. The more you take, the less you’ll have to give you an income.  

If you have different pensions, you could decide to do different things with each one. For example, use all of one to buy an annuity and leave another invested so it can continue to grow. 

You could also choose to buy an annuity to provide enough income to cover your essential bills and use a different method to pay for other costs – see all the ways to take money from your pension

Whatever option you go for, you’ll need to plan carefully to make sure your income will be enough to last your entire retirement – which is often over 20 years.  

Your provider will usually move all your invested pension money to more stable investments the closer you get to your scheme’s ‘normal pension age’ – which is often the same as your State Pension ageOpens in a new window

But, if you want to leave any of your pension invested after this, you might miss out on investment growth by leaving your money in your provider’s default fund.  

When you pay into a pension, the government usually adds a top-up payment called tax relief. This is the money you’d normally pay in Income Tax. 

You can usually get tax relief on all your pension contributions up to the annual allowance. For most people, this means:  

• your contributions must be less than (or equal to) the amount you earn, and  
• contributions from you and your employer must be less than £60,000.  

But if you take taxable money from your defined contribution pension, the £60,000 limit reduces to £10,000. This is called the money purchase annual allowance (MPAA).  

Buying a fixed-term annuity will trigger the MPAA but a lifetime annuity does not. 

If you’ve taken a tax-free lump sum, you might also have to pay extra tax if you put some or all of it into a different pension scheme.

This is because pension recycling rulesOpens in a new window stop you from taking tax-free cash out of a pension and then paying it back in, so you get more tax relief. If you do this, you’ll usually have to pay tax worth 55% of the tax-free lump sum you received. 

If your annuity income increases your overall earnings or savings, this might affect any benefits you’re entitled to claim. 

You can use our Benefits calculator to check what you’re entitled to now and how it might change if your income or savings increased.  

You can also use Advicelocal to find free and confidential benefits adviceOpens in a new window

Any money held in your pension usually cannot be claimed by anyone you owe money to, even if you’re declared bankrupt or have a formal debt repayment plan. 

But if you take money out of your pension, you might be told to use it to make regular repayments or the whole lump sum could be claimed.  

Before taking pension money, you can talk to a free debt adviser to understand your options.  

If you’ve set up an annuity so it might pay out to your beneficiaries, any money they receive will usually be taxed as their income. This is different to the rules for inheriting any money left invested in your pension. 

If you die before age 75, your pension can usually be inherited tax-free as long as: 

• the money is paid to your nominated beneficiaries within two years of your pension provider being aware of your death 
• the total amount inherited from all your pensions is not higher than the lump sum and death benefit allowance (LSDBA). 

The LSDBA is £1,073,100 for most people and counts tax-free lump sums taken from your pension before and after you die. This means your limit might be lower if you’ve already taken tax-free money.

Your beneficiaries will usually pay Income Tax on any amounts above the LSDBA.  

In all other cases, including if you die after age 75, your pension usually cannot be inherited tax-free. The inherited amount is normally added to your beneficiary’s other income to calculate how much Income Tax is due.  

Buying an annuity is one way to take money from your defined contribution pension.  

You can also choose to: 

• take your pension in one or more lump sums, with up to 25% of each amount paid tax-free 
• take some tax-free cash (up to 25%), and: 
  • leave the rest invested in a flexible pension drawdown plan until you need it 
  • set up a flexible income that you can stop or change at any time 
  • take the rest as one or more lump sums. 

A free and impartial Pension Wise appointment  can help explain your pension options.

If buying an annuity is right for you, there are steps you should take. 

If your pension provider offers guaranteed annuity rates, they might offer a higher guaranteed income than you could buy elsewhere. 

You can usually find out if your scheme offers this by: 

• contacting your provider 
• checking the terms and conditions or paperwork for terms like: 
  • retirement annuity contract 
  • section 226 policy 
  • with-profits 
  • preferential 
  • guarantee. 

Whether or not your provider offers guaranteed annuity rates, always compare how much different providers will offer you.  

You can:  

• use our annuity comparison tool 
• get quotes from different annuity providers yourself 
• pay a regulated financial adviser to recommend a provider and product for you

For help comparing providers, see our guide about How to find the best deal when taking your pension.

When you’re happy you’ve found the best deal for you, the next step is to set up the annuity.  

You’ll usually be asked medical questions and to confirm any optional extras, including if you’d like: 

• your annuity income to increase each year or stay the same 
• protection or a guarantee so your annuity cannot pay out less than you'll pay for it. 

Most annuities will have a 30-day cooling off period so you can cancel and ask for your money back if you change your mind. But after this, an annuity cannot be cancelled.

Do not access your pension or buy an annuity from a provider because of a cold call, visit, email or text. It’s likely a scam designed to steal your money.  

You might lose all your retirement savings and have to pay an expensive tax bill.

For more information, see our guide How to spot a pension scam.

Annuity providers might use temporary or emergency tax codes when making your first payment.  

If you think you’ve overpaid tax, you can check how to claim a tax refundOpens in a new window on GOV.UK. HMRC might also pay it back to you automatically at the end of the tax year.

If you do not use all your pension money to buy your annuity and keep the rest invested, remember that its value can rise and fall until you choose to take it.

Depending on how well it performs, you might want to consider changing how your pension is invested.

It’s also worth comparing pension providers at least once a year to see if you might be better off transferring your pension elsewhere.

If you have any questions about your pension, our pension specialists can help – it doesn’t matter how old you are.