What is an Annuity?
An annuity is an income purchased from an insurance company. This can be from your own funds or as is more often the case, using funds built from within your pension.
Your pension fund does not automatically start paying you an income when you retire. Instead, when you decide to take an income, your pension is normally converted into a lifetime annuity, an income for life no matter how long you live. Under current legislation, you have to buy an annuity with your pension fund by the age of 75.
There are two very important points to remember when setting up your annuity.
1. You do not have to stay with your current pension provider when you retire.
2. Not all annuity providers are equal. The difference between the best and worst annuity incomes can be considerable.
At retirement a pension fund will normally allow you to take some of the fund as tax
free cash, the remainder has to purchase an income for life, an annuity. As the income is taxable, in most cases it is advantageous to take the maximum tax free cash at retirement and purchase a separate annuity.
Within PensionsNetwork you can find out what an annuity is and who can purchase an annuity.
This way you avoid paying tax on the income from the tax free cash element of your annuity. With a standard annuity, you can rest safe in the knowledge that your income will never run out or decrease. Once your annuity is set up your chosen option of income is fixed, so it is important to choose your options carefully.
Different companies offer different annuity rates and these change frequently so its important to review these at the time you retire. Just because your pension company is the most appropriate for building up your pension fund does not mean that it will be the most appropriate for your retirement income.