Question 1

What is an annuity and how does it work?

Accepted Answer

An annuity is a financial product that converts your pension pot into a guaranteed income for life (or a fixed term). You hand over your pot to an insurance company and they pay you a regular income in return. Once purchased, it is generally irrevocable — you cannot get your pot back, except during a 30-day cooling-off period.

Question 2

What affects annuity rates in the UK?

Accepted Answer

Annuity rates are influenced by your age at purchase (older = higher rate), your health and lifestyle (smokers and those with medical conditions may qualify for enhanced annuities 20-40% higher), the type of annuity (single life pays more than joint life), whether you include inflation protection (RPI-linked pays less initially), the guaranteed period, gilt yields, and the specific provider. Rates vary significantly between providers, so shopping around is essential.

Question 3

Should I buy an annuity or go into drawdown?

Accepted Answer

This depends on your individual circumstances. An annuity provides certainty — you know exactly what you will receive each month for life. Drawdown offers flexibility and potential for growth, but carries investment risk and the possibility of running out of money. Many people use a combination of both. This is a major financial decision and you should consider speaking to an FCA-regulated financial adviser before deciding.

Question 4

Are annuity payments taxable?

Accepted Answer

Yes. Annuity income is taxable as earned income under PAYE. Your annuity provider will deduct income tax before paying you. The amount of tax depends on your total income in the tax year, including the state pension and any other earnings. Scottish taxpayers are subject to different income tax rates and bands.

What income could your pension buy?