Annuities (secure income)

A secure lifelong income – an annuity

If you're looking for a regular secure income to see you through the rest of your life, then an annuity could be the route for you.

With an annuity:

  • You know how much you'll be getting, and when
  • You'll be paid an income for the rest of your life
  • Once an annuity is bought, that's it – you can't change it
  • You should shop around (known as the Open Market Option) as you're likely to get a higher income for your circumstances
  • There is to choose from

Here's how it works

Take tax-free cash

You can usually take up to 25% of your retirement savings as tax-free cash. The more tax-free cash you take, the less you'll have left to provide an income.

Buy an annuity

You can use your remaining retirement savings to buy an income for the rest of your life. You can get different types depending on your needs. The income you receive is taxed through

Choose your type of annuity and options

The most common types are 'standard' annuities and .


You tailor the options to meet your needs, for example you could choose to help protect your income against inflation or whether you want the income from your annuity to be paid to someone else after you die. However any options you add will reduce the initial income you receive.

Enhanced or impaired life annuities could offer you a higher income as they take into account your health and lifestyle.

Things to be aware of

Inflexibility of annuities

Your circumstances might change in the future but your annuity won't. The way you set up your annuity when you buy it will determine the income you receive for the rest of your life and whether the income continues to be paid to someone else when you die.

Guaranteed annuity rates

Some older pensions offer guarantees on the annuity rate you get when you reach your retirement age. Make sure you check if this applies to any of your pensions, as the guaranteed rate will often be much higher than the income you could get by shopping around using the Open Market Option.

How much income you'll receive depends on

  • Annuity rates, which are influenced by interest rates when you buy the annuity
  • Who you buy it from – you don't need to buy from your pension provider
  • The value of your retirement savings used when you buy the annuity after any tax free cash has been taken
  • Your age – the older you are when you buy your annuity, the more likely you are to receive a higher income
  • The options you choose, for example providing an income for someone after you die or protecting your income against inflation. You'll get a lower income to start with depending on the options you choose
  • Your health and lifestyle – you might get a higher income for some types of annuities like 'enhanced' or 'impaired life' if you have certain health or lifestyle conditions that could affect how long you're likely to live
  • Where you live – if you live in a postcode area linked with lower life expectancy, some annuities will offer you a higher income

You may get back less than it costs

The amount of income you receive takes into account your life expectancy, so if you die early you may receive less income than you've paid for. However, if you live longer than expected, you could receive more income than what you paid.

Income could go down due to inflation

Over time, inflation will reduce the buying power of your income. For example, if inflation is 2.5%, then in 20 years' time £10,000 will only buy the same as £6,100 today. You can opt to have your annuity income increase yearly by a fixed amount or in line with inflation.


If you put off the decision to buy an annuity and leave your retirement savings invested, this will not necessarily mean you get a higher income when you do buy one.

Tax implications

If, when added to any other taxable income you have coming in, your income is greater than your , you will probably have to pay tax.

The annuity company will be sent your tax code by the taxman and your annuity will be paid to you net of income tax – just like income you receive from an employer.

Impact on tax allowances and benefits

Taking an income could push your income into a different tax bracket and affect any tax allowances you are entitled to. The amount of income and savings you have can also affect any means tested state benefits you may have. You can find out more on Gov.UK
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Tax and law

You'll see a lot of information about tax and law on this website. We've based this on our understanding of current UK law and HM Revenue and Customs practice, as at 6 April 2015. Bear in mind, any changes to these rules, or to your personal circumstances, could affect what you get from your retirement savings.

Watch out for fraudsters

Whatever you do, don't let the fraudsters get their hands on your retirement savings. Fraudsters may offer you tempting ways to invest your cash, they may seem convincing and promise big returns. But the impact on people falling prey to these scams can be devastating – you could lose the lot. Sorry, but if it sounds too good to be true, then it probably is.

How to avoid a pension scam

Drawdown -
how does it work?

Drawdown lets you take some or all of your tax-free cash, leaving the rest of your retirement savings invested.

Drawdown explained

Cash lump sum -
how much can I take?

You can take a cash lump sum from the retirement savings you've built up over the years – you don't have to take it all at once.

Cash lump sums explained

Looking for advice?

You can get free and impartial guidance from Pension Wise. We can also help you find a financial adviser to give you the advice we can't.
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Pension wise

Free, impartial, government service

Pension wise
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How much money might I need?

Start building a picture of how much income you might need each month with our easy-to-use interactive calculator.

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