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 age at purchase, health and lifestyle, the type of annuity, whether inflation protection is included, the guarantee period, gilt yields, and the specific provider. Rates vary between providers, so personalised quotes can differ from published examples.

Question 3

How does an annuity compare with drawdown?

Accepted Answer

An annuity provides certainty because income is usually guaranteed for life, but the pot used to buy it is normally no longer accessible. Drawdown offers flexibility and continued investment exposure, but carries investment risk and the possibility of running out of money. Some people compare a mix of both. This is a major financial decision and regulated advice may be useful.

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?