Freedom factor 2: Guaranteed income

To take a guaranteed income, you use your pension pot to buy an insurance policy called an annuity which pays you an income (either for the rest of your life, or a fixed time – five or 10 years, for example).

Before you unlock this option, there’s a lot to think about, and you may want to consider taking guidance or advice. We can help with this. Read on!

Three feel good factors about guaranteed income (‘annuities’)

✔️ Guaranteed for life (or a fixed length of time)

Annuities are guaranteed to pay out for life (or for the length of time you choose) – meaning you won’t have to worry about where your income’s coming from.

✔️ Choice and flexibility

You can tailor your income to your personal circumstances. For example:

- You can choose a level annuity, which gives you a higher starting income.
- You can add extras such as:
  - yearly increases (fixed or in line with inflation),
  - a dependant’s pension if you die before them, or
  - a guarantee that the income will continue for a certain time – even if you die during that time.
  Be mindful that each extra you add will usually make your yearly income smaller.
- If you have a health condition that could shorten your life, you could potentially get a higher income.

There are lots of options. We can help you tailor your annuity to your own circumstances.

✔️ Straightforward tax

You pay tax on your guaranteed income in the same way as earned income. For most people, this means your retirement income is taxed at your highest rate of income tax for the year. Your annuity provider usually takes the tax off your retirement income and pays you the net income (so the amount after the tax has been taken). Before taking your pension as guaranteed income, you can normally take up to a quarter of your pension pot as tax-free cash (you can then use the rest to buy your annuity – but remember, this will make your guaranteed income smaller because it’s using a smaller pension pot).

Three not-so-good factors about guaranteed income (‘annuities’)

❌ Annuities can seem to be poor value

The amount of yearly income you’ll get can look low compared to the amount in your pension pot. And any extras you add – such as, tax-free cash, increases, a dependant’s pension – will make your yearly income smaller. But remember: the income is paid for the rest of your life (or a fixed time).

❌ You can’t change your choice in the future

Once you’ve started to receive the income from your annuity, you can’t usually change it – so it’s important to ensure you’ve made a good choice by shopping around or getting expert support.

❌ The income can stop when you die

Depending on what kind of annuity you choose, the income can stop completely when you die, with nothing left over. You can choose an annuity that pays a pension to a dependant, but that will stop when your dependant dies.

Helping you unlock your retirement freedom

If you’re thinking of taking your pension benefits soon, our retirement experts can help you unlock the options. Ask for a personalised options pack with a starting annuity quote, to give you an idea of what you could have.

Our friendly retirement team can then give you guidance to help you decide whether guaranteed income is a good choice for you. And they can also shop around to get a tailored annuity quote that’s: