Pension annuities

It's wise to start researching annuities at least six months before you plan to retire. This gives you time to explore different options, gather quotes, and make an informed decision. Remember that you don't have to buy an annuity as soon as you retire - you can keep your pension invested and buy an annuity later if rates improve or your circumstances change.

For example, if you retire at 65 with a £200,000 pension, you might choose to take your 25% tax-free cash (£50,000) and keep the remaining £150,000 invested in a drawdown account while monitoring annuity rates. If rates improve from, say, 5.5% to 6.2% a year later, waiting would have increased your potential annual income from £8,250 to £9,300.

Generally, no. Annuities are a lifetime commitment and can't be changed or cancelled once the cooling-off period (usually 30 days) is over. This is why it's crucial to consider your options carefully and get professional advice before making a decision.

If you buy a level annuity and then later develop health problems that would have qualified you for an enhanced annuity, unfortunately you won't be able to change plans. This is why medical underwriting and careful consideration of your health status is another crucial step in the purchase.

Some insurers now offer "lifestyle-tracking annuities" that can increase payments if your health deteriorates. This can be a useful alternative to enhanced annuities but typically starts with a lower initial income.

This depends on the type of annuity you choose. A single life annuity ends when you die, while a joint life annuity continues paying your spouse. You can also add guarantees like value protection or guarantee periods to ensure some value comes back to your estate.

The cost of these protections varies with age, health, and market conditions. For instance, a 65-year-old couple might see their initial income reduced by 10-15% when choosing a joint life option versus a single life annuity.

Your annuity income is taxed as earned income at your marginal rate. Still, you can usually take up to 25% of your pension pot as a tax-free lump sum before buying an annuity. The remaining income is added to any other income you receive (such as State Pension) to determine your tax band.

Let's imagine you have a £300,000 pension pot and take £75,000 (25%) as tax-free cash. You use the remaining £225,000 to buy an annuity paying £12,000 per year. If you also receive a State Pension of £10,600 per year, your total annual income would be £22,600.

In the 2024/25 tax year, with a personal allowance of £12,570, you would pay tax at the basic rate (20%) on £10,030 (£22,600 - £12,570), resulting in a tax bill of around £2,006. This means your effective tax rate on your total income would be about 8.9%.

Yes, you can combine multiple pensions to purchase a single annuity, which might secure you a better rate due to the larger sum.

It plays to be cautious: some older pensions might have valuable guaranteed annuity rates (GARs), sometimes as high as 9-11%. These would be lost if transferred, so you should check for such guarantees and seek professional advice before consolidating.

If you're opting to investment-linked annuities, it's important to note that you don't make the specific investment decisions yourself (as you would when buying individual stocks or bonds). Instead, you typically choose from pre-selected investment strategies or funds. The level of choice varies between providers.

The insurance company / annuity provider manages the investments through their own fund managers or external ones. You may be able to choose from a selection of their funds (e.g., cautious, balanced, or adventurous investments), but the day-to-day decisions are made by the managers.