Annuities (secure income) in detail

Think an annuity is right for you?

How it works in detail

1. You select your annuity options.

2. The pension company will pay any tax-free cash and pay the rest of your retirement savings to your annuity company.

3. The annuity company guarantees to pay you an income for the rest of your life or longer depending on the options you've chosen.

Before you make a decision, you should consider the following:

Once you've bought an annuity, you can't change your mind

You can't currently convert the part of your retirement savings you've used to buy your annuity back into a cash lump sum or go into drawdown. So you need to be completely certain it's the right choice for you and always look around for the best option.

What other income you will receive, how much and when

You should consider other income you may get and when you'll receive it. For example, state or final salary pension, income from property or other investments or perhaps you'll still be receiving a salary. Understanding how much income you might get from other sources may help you decide how much annuity income you'll need.

The amount of secure income versus amount of tax-free cash

It's up to you how much of your retirement savings you use to buy an annuity. The more you use, the higher the amount of income you'll get. Taking some tax-free cash, or leaving some of your retirement savings invested until a later date will reduce the amount of income you'll get from your annuity.

Provide an income for a partner or dependants

Some or all of your regular income could be paid to your partner for the rest of their life when you die, this is called a joint life annuity. Or you could opt for a 'guaranteed period'. This means your income will continue to be paid after your death up until the end of the guaranteed period. You just need to nominate who you want to receive it. If you choose to do this, your income will be lower when your annuity starts.

Whether you qualify for an enhanced or impaired life annuity

You might get a higher income from 'enhanced' or 'impaired life' annuities, if you have certain health or lifestyle conditions that could affect how long you're likely to live. For example, smoking, regularly taking medication, being underweight or overweight, if you've worked in a hazardous occupation or if you live in an area where life expectancy is lower.

You could receive up to 50% more income if you qualify.

Source: Which.co.uk, 2015
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Whether you want your income to rise with 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.

What next?

Buying an annuity is an important decision and it makes sense to read the information on this website and seek financial advice or free and impartial guidance from Pension Wise before you make a decision.
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We can:

  • help you find a financial adviser who can provide you with financial advice
  • provide you with more information and how to proceed if you think an annuity is right for you

Whatever you want to do next, we can help.

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
Pension wise

Free, impartial, government service

Pension wise
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