How Do Annuities Work?

An annuity provides a secure way of converting money you have built up in your pension fund into a guaranteed regular income during your retirement. An annuity will pay out for as long as you live and will cease when you die unless you arrange for income to continue to be paid to your spouse or dependants after your death.

Prior to converting your pension fund to an annuity, you are normally entitled to take up to 25% of the value of your fund as tax-free cash. This is also known as a Pension Commencement Lump Sum. You can use this money however you want, with the only exception being that you cannot invest it in another pension. Taking this tax free sum will reduce the money available to buy your annuity and also reduce your income in retirement.

The amount of income you receive as an annuity will reflect how much you have in your pension fund and how long the annuity provider expects you to live for. The income will usually be paid monthly into your bank account. If you wish, you can choose to have it paid quarterly or annually rather than monthly.

Annuity providers can quote very different income levels. Some providers, such as Just Retirement, are able to offer specially enhanced terms if you smoke, are overweight or have a history of health related conditions. It is therefore vital to search for the best available deal from the entire market by using your right to shop around, known as the Open Market Option.