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Types of annuity

Guide to a guaranteed income for life (also known as an annuity)

Your pension savings can be used to buy an annuity which will provide you with a guaranteed income for the rest of your life. You can use all of your pension savings to buy an annuity, or you can combine your options and take some of your pension savings as cash and use the rest to buy an annuity. If you take a lump sum, 25% will be tax free and you will pay tax on any cash lump sum taken above that at your marginal rate.

Obviously if you take a cash lump sum, the amount of income you can buy with the remaining pension savings will be lower. With an annuity, the payments would be subject to income tax at your marginal rate, dependent on your total earnings.

There are different types of annuity to consider, depending on your circumstances:

  • Joint life – pays out to you first and then your spouse or partner after your death.
  • Single life – payments stop when you die. This may better suit your needs if you don’t have a partner or if your partner has made their own pension arrangements.
  • Enhanced and impaired life annuities – these often pay out a higher income because the annuity provider takes into consideration all your lifestyle and medical condition e.g. if you smoke, have asthma or even high blood pressure. Different providers will provide different rates for different lifestyles and conditions.
  • Escalating annuities – these pay out less to start with, but increase over time to keep up with inflation.
  • Guaranteed period – with any annuity you could also choose a guarantee period to protect your dependants. For example, if you guarantee your annuity for five years and you die after three, your annuity payments will still be paid to your estate for the remaining two years.
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