Pension annuities

Annuity income will stop when you die. However, if you need to provide some protection for your loved ones, there are options you can choose when you buy an annuity. They can’t be added later.

For example, you can buy a joint life annuity. This will pay you a guaranteed income for the rest of your life. If you die before whoever you choose as the joint life, they will begin to receive a proportion of your income. A 50% joint life annuity is most common, but you can choose other percentages.

You could opt for a guarantee period, which makes sure payments continue for this time even if you die during the term.

There’s also the option of value protection. This is extra cover you can add to an annuity to pass on the value of your annuity to your loved ones, not including any payments you’ve already received.

Any money left to your loved ones from a pension currently doesn’t form part of your estate, like your savings or property do. From April 2027, it’s proposed by the government that unused pension pots and death benefits will be included in your estate for inheritance tax. This won’t apply to joint life annuities or if a benefit is paid to your spouse or civil partner because of a guarantee period or value protection. It will include benefits from a guarantee period or value protection if paid to anyone else.

Yes, they are. After taking your 25% tax-free lump sum, the remaining 75% is used to buy an annuity that’s taxed as pension income. The amount of tax you pay will depend on how much your pension income is, plus any other taxable income you receive during the tax year. It might mean that you pay income tax at a higher rate than you have previously.

Request a current figure from your pension providers and they will supply this.

When you decide to take benefits from your pension pot, you can usually take up to 25% without paying any tax. This is sometimes known as a pension commencement lump sum. During your lifetime, you can take up to £268,275 in total from all your pensions tax free. This limit is called your lump sum allowance (LSA). Your LSA might be higher if you applied for protection before 6 April 2025.

Depending on the size of your pension pot you may be able to mix your retirement income options. For example, you may wish to buy a guaranteed income from an annuity that meets your essential expenditure only. You may then wish to use the flexibility of pension drawdown to meet your non-essential expenditure.

When you buy an annuity you can choose whether the income increases each year. For example, you may want your income to increase in line with inflation, or you may want it to increase by a fixed percentage every year. Please note, if you choose an income that increases every year, your starting income will be lower. As it’s not possible to change to an increasing income, or move from an increasing income to a non-increasing income after an annuity has started, you need to choose your preferred option at the time you buy the annuity.

This will depend on the number of years of National Insurance contributions you’ve made. You can check how much state pension you’re entitled to online.

You’ll normally have an initial cancellation period (usually 30 days depending on provider) when you can cancel an annuity and get your money back. This period is designed to give you time to review the terms and conditions and ensure the product meets your needs.

After the end of that cancellation period you won’t be able to change your mind and get your money back.