Frequently Asked Questions
What is a pension annuity?
A pension annuity uses the money built up in a pension fund to provide a secure, guaranteed income in retirement.
What is the difference between a pension and an annuity?
A pension fund is what you pay in to throughout your working life and it builds up. An annuity is a type of insurance product that converts the lump sum of money built up in your pension fund into a guaranteed income.
Some people may refer to the income from an annuity as ‘a pension’.
Do I have to take tax-free cash?
No, you don’t have to take your tax free cash entitlement.
Up to 25% of your pension fund is usually available as a tax free cash lump sum and the rest is used to purchase an annuity and the income from this is taxable at your normal income tax rate. If you choose not to take this lump sum, then the amount in your fund will be higher and so, your annual income will be higher. If you do take your tax free cash lump sum, then there will be less left in your fund so your income will be lower.
You should consider what is best for you. If you choose not to take your tax free cash lump sum it then you will pay tax at the same rate as your normal earned income on the whole fund.
Do I have to buy an annuity from my pension provider?
No! Government legislation (the Open Market Option) says that you have the right to search the market for the annuity that will give you the best deal. Don’t assume that because you have been with your pension company for a number of years they will automatically give you the best deal.
Why should I look at other providers?
Different providers have different rates and the difference between the highest annuity rate and the lowest annuity rate can be massive. If you don’t see what annuity rates are available, you could find that the income you receive is lower than it could have been if you’d shopped around and there’s nothing you can do about it as annuities can’t be changed once they are set up.
Also, if you have any lifestyle or medical conditions such as if you smoke, have high blood pressure or cholesterol, or certain other medical conditions, you could be eligible for an enhanced annuity rate. Some people refer to these as smoker rates as that is a common qualifying criteria. Not all pension providers offer enhanced annuities, so you may find that your pension provider doesn’t take any lifestyle or medical factors into account when making you an offer.
Does your annuity calculator use accurate annuity rates or rate tables?
The annuity rates used in our free online annuity calculator are live, real-time rates and are retrieved from the providers every time you click ‘Calculate’. We do not use annuity rate tables because the providers change their annuity rates frequently and the annuity rate tables can become inaccurate.
How long does it take to set up an annuity?
Which company your pension is currently with generally determines how long it takes to set up your annuity. Some are very quick at sending money to your chosen provider but some are slower. As a guide, you should allow roughly 6-8 weeks for the whole process but we will do everything we can to make sure this time is as short as possible.
Are annuity rates guaranteed?
Once an annuity is set up the annuity rate will not change. Until it’s set up though, the annuity rates could fluctuate. Your pension annuity illustration is guaranteed for a short period of time from the day it’s produced. If the funds are received from your pension company within that time then that’s the rate you will receive. If the funds are received after that period, then the rate will be recalculated using current annuity rates before setting your annuity up and the payment amount may change.
Why does my address make a difference?
Annuity providers calculate the amount they will pay you based on a number of things, including your postcode. They use the average life expectancy for each postcode to help calculate your income.
Why do you need to know if I smoke?
If you are a regular smoker, you could qualify for an enhanced annuity rate.These are often known as smokers rates annuities.
Why do you need to know my medical conditions?
If you have or have previously had certain medical conditions, you could be eligible for an enhanced annuity rate.
Will you tell me which the best annuity to take is?
No, we offer a guidance only service. What this means is that we will ask you some questions, give you the facts about your annuity options, then obtain quotes based on the answers you give. Then we’ll present you with the quotes and you can decide if you’d like to go ahead with any of them. All of the decisions are yours.
Do I pay tax on my income?v
Yes, your annuity income will be taxed as pension income under the P.A.Y.E. (Pay As You Earn) scheme.
How much tax do I pay?
If you send in a current P45, you’ll pay tax in line with your current tax coding. If you don’t have a current P45, tax will usually be deducted at the current emergency tax code for the first month. The annuity provider will give HMRC (Her Majesty’s Revenue & Customs) details of how much you will be receiving and they will issue the relevant tax coding notice which will be applied to your future payments.
How will payments be made?
Payments will be made directly into your bank account.