Lifetime annuities, explained

Lifetime annuities provide a guaranteed income for life, in exchange for some or all of a client’s retirement fund. With options for fixed or increasing payments, and potential survivor benefits, they remain an important option to consider for many people approaching retirement.

As part of our Bitesize Technical series, Senior Technical Consultant Joshua Croft explains the detail.

Key insights on lifetime annuities

A lifetime annuity is a financial product, purchased from an insurance company, that converts a retirement fund into a secure, guaranteed income for life.

While most people take a tax-free PCLS before purchasing an annuity, it’s possible to use the entire pension fund for a higher income, or to buy an annuity with funds previously designated to drawdown.

The annuity does not have to be bought from the same provider where pension savings were accumulated. People can explore better rates through the open market option.

The annuity income depends on factors like age, health, and life expectancy. Annuities can be set up on a single or joint life basis, with the option for survivor’s benefits.

The income from an annuity can be fixed, or set to increase annually by a fixed percentage or in line with inflation. A fixed income usually provides a higher initial payment.

Annuities can include a guarantee period, ensuring payments continue for a specified duration, even if the policyholder dies.

Annuity income is subject to income tax, deducted through PAYE. However, annuity death benefits are tax-free if the policyholder was under 75 at the time of death.

More Bitesize Technical

Take a bite out of ‘Uncrystallised Funds Pension Lump Sums’ , the previous instalment of our pension benefits Bitesize Technical series, or start from the beginning, here.