Annuities & Taking An Income From Your Pension

A joint life annuity means your spouse, if still alive, will continue to get an income following your death. You can choose for them to receive any percentage of your income, 100%, 67% and 50% are common, although the cost increases with the percentage. Figures vary, but expect to get around 10-20% less income yourself if you choose a joint life annuity rather than one based just on your your life.

You can choose a period, usually 5 or 10 years, that your annuity is guaranteed to be paid for if you die meanwhile. The payments would normally be made to your surviving spouse or another dependant. If you have a joint annuity the spouse's pension normally only kicks in after the guarantee has finished, unless you choose otherwise (which makes the annuity more expensive). Some insurers allow the remaining payments to be paid out as a single lump sum, less a 35% tax charge.

Some insurers also offer 'value protection'. You choose the amount of your fund you wish to protect and if you die before 75 the chosen value is paid out as a lump sum, less income payments already made and a tax charge, currently 35%.

If you opt for a level annuity pension, your income will be fixed for life. This means it will gradually buy less and less as the cost of living rises due to inflation.

If you have a level pension income of £10,000 and annual inflation is 2%, your income would buy just £8,171 worth of goods and services after 10 years and £6,676 after 20 (in today's terms).

You can protect the purchasing power of your annuity income by linking it to inflation (called 'index-linked'), so that your income increases each year by the Retail Price Index (RPI). Or you could choose for your income to increase by a fixed amount each year. However, both of these options can be costly, so don't be surprised if it reduces your initial income by 40% or more compared to a level annuity.

Find out whether a level or index-linked annuity might offer better value for you using the Candid Level versus Index-Linked Annuity Calculator.

If an insurer expects your lifespan to be shorter than average due to illness, they'll usually offer you a better annuity rate to reflect this (called an 'impaired life' annuity).

If you're a smoker or overweight you might also receive a better rate than normal (an 'enhanced' annuity), for similar reasons. The rate for smokers could be 20% or more higher than that for non-smokers.

How often do you want the income paid? Monthly, quarterly or annually? Choose the option that best suits your needs.

You can have income paid at the beginning of your selected period or the end. If the beginning, you should expect to receive a slightly lower income compared to the end.

Although quite rare, you can link your annuity income to investment performance (via a 'with-profits' or 'unit-linked' fund). Charges are likely to be higher than a standard annuity and this approach means taking risk, so it's hard to find a sensible reason for buying one. Be warned that these annuities usually pay salesmen and advisers more commission than a standard annuity, giving the less scrupulous ones an incentive push this option.

Your existing pension provider(s) will try to sell you their annuity when you come to retire. Never, ever go ahead. Even if their quote is the most competitive (chances are it won't be) you could save a small fortune by buying it through a discount broker instead. If you're confused about your options (after using this site you hopefully won't be!) then use a good independent financial adviser (IFA). It shouldn't prove any more expensive than buying direct from an insurer.

Generally overkill if you simply wish to buy a straightforward pension annuity. If you do use an adviser then the risk of bias is reasonably low as annuity commissions are fairly standardised, but always check that the recommended annuity is competitive using the FSA website and/or quotes from other advisers.

However, a good IFA could prove very worthwhile if you wish to draw an income from your pension rather than buy an annuity. This is a bit more complex and most people would benefit from advice to ensure they correctly follow the rules and don't risk ending up with an empty pension pot before they die.

By far the best option for annuity purchase if you understand what you're doing (and there's no reason you shouldn't after using this site!). You won't get advice but you should get either an enhanced annuity rate or cashback. Most discount brokers will help you find the most competitive deals if you tell the type of annuity and options you want.

The best value route is likely to be a broker who charges a fixed admin fee and rebates all the commission they receive.

The amount of income you can draw each year is set at between £0 and 100% of a pension (based on a single life level annuity) calculated by the Government Actuary Department (GAD). Note: there is no maximum limit provided you receive at least £20,000 annual income for life (via state and other pensions). The maximum needs to be recalculated every three years.

For full instructions and the GAD tables visit the HMRC website.

The amount of income you can draw each year is set at between 0% and 100% of the GAD pension. Note: there is no maximum limit provided you receive at least £20,000 annual income for life (via state and other pensions). The maximum needs to be recalculated every year. You can use your remaining pension fund to buy an annuity at any time.