Living with an Annuity | Money Saving Advisors
Guidance on managing your finances after buying an annuity—budgeting, inflation, and other considerations.
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What is an annuity?
When you buy an annuity, you're converting your pension savings into a steady income for a set period or the rest of your life. Many people choose annuities for the certainty they offer - it's like having a regular paycheque, even when working life is over.
The basics of living with an annuity
- Steady income you can count on
An annuity pays you a fixed amount - usually monthly - which can help with budgeting and essentials. The size of these annuity payments depends on the type you choose and the purchase price. - Knowing your money is secure
Once you buy an annuity, the provider guarantees your payments. You can usually take up to 25% as a tax-free lump sum, and the rest provides your annuity income. Your payments won't increase with inflation unless you choose an annuity that grows over time. - What are the tax rules?
After taking your 25% tax-free cash, the other 75% is subject to income tax when it's paid out. The tax treatment is similar to how your salary was taxed at work - it's based on your total earnings for the year, after your personal allowance of £12,570.
Making the most of your annuity
- Plan for extra costs
While annuities provide an income, it's a good idea to set aside savings for expenses like home repairs or healthcare. If you have a health condition like high blood pressure, you may qualify for an enhanced annuity, which can offer higher income. - Consider your lifestyle goals
Annuities give you peace of mind, but they don't have to limit your lifestyle. Consider your personal circumstances and retirement planning - some people combine an annuity with other investments or savings for holidays and hobbies in later life.
Summing up
Living with an annuity means a steady, reliable income that helps you plan your later years without financial stress. But while your essentials are covered, it's important to think about extra savings to enjoy your retirement to the full.
Frequently Asked Questions
Can I access my annuity money if I need it?
Once you buy an annuity, you exchange a lump sum for a guaranteed regular income, so your initial pension pot is tied up. Some products, like a fixed term annuity, may offer more flexibility - such as a lump sum payment at the end of the term if your circumstances change. Otherwise, the money is locked in to give you steady payments.
Will my annuity payments increase with inflation?
Most standard annuities pay a fixed amount each month or year, so the income you get stays the same over time. That means inflation can slowly reduce the future value of your money. To help with this, some annuities offer an inflation-linked option where your payments increase annually to keep up. These tend to start with lower initial payments, but they can protect your spending power.
What happens if I die early?
Annuities are designed as an income for life, so if you die earlier than expected, the payments usually stop. Some annuities come with value protection or a guarantee period, with payments to your beneficiaries after you die, while a joint life annuity goes on paying your spouse or partner. Keep in mind, beneficiaries may need to pay tax on any annuity income paid to them.
Can I combine an annuity with other income?
Yes - many people use annuities as one part of their wider retirement plan, which might include state pension, investments, or other income. Combining them can give you more flexibility and sometimes a higher total income. You can ask your pension provider about the best deals and annuity rates or use Pension Wise, the UK government's free advice service.
Is an annuity right for me?
Annuities suit people who want a steady, guaranteed income with low risk - perfect if you're cautious about market changes or want certainty about your monthly money. But they might not work for everyone, especially if you want flexibility with your savings or expect to need lump sums for big expenses. Always seek impartial guidance to understand your options.
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