Personal Pension Annuity

Planning and saving up for your retirement is essential, but deciding on how to manage and receive your hard-earned funds may leave you wondering what your choices are.

In this guide, we take a look at what personal pension options are available to you once you reach 55, what a personal pension annuity is, and much more.

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What is a personal pension annuity?

This is a term that’s occasionally used when someone with a personal pension purchases an annuity to receive a regular stream of income from their pension pot.

An annuity provides you with a guaranteed source of income, either for your lifetime or for a fixed period. Once you turn 55, you can purchase one using all or part of your pension pot. Before the Pensions Freedoms Act of 2015, your only option was to buy an annuity, but now you have the freedom to do what you like with your money.

What are the benefits?

The main advantage is that you can use an annuity in conjunction with a personal pension to draw a set income from your savings in retirement.

By doing this, you could supply yourself with an income while letting any leftover funds in your pension pot accrue, potentially giving you a larger pension pot when you need it in the future.

 What are the alternatives to taking out an annuity?

If you’re unsure about annuities or want to know your alternative options, you could choose to enter an income drawdown or leave the funds invested. See the sections below for a quick overview of each option.

Income drawdown

If you have a personal pension, you can enter into income drawdown, of which there are two types: flexi-access drawdown, or Uncrystallised Fund Pension Lump Sum (UFPLS).

With a flexi-access drawdown, you can withdraw your 25% tax-free lump sum and use the rest as you wish – you can withdraw it all or take regular payments from it, though it will be classed as taxable income.

With an Uncrystallised Fund Pension Lump Sum, you don’t take out your 25% tax-free lump sum and instead only get 75% of your income will be taxed.

Leave the funds invested

If you’re in a position where you don’t need to use your pension pot, you could leave it to grow. However, in order to make the most of your pot and ensure that it’s accruing at a rate you’re happy with, speak with an expert. They could find you a scheme which better suits your financial goals.

Which is my best option?

It all depends on your circumstances and what you want to get out of your pension.

An annuity could give you the most control over your money, whereas leaving a personal pension plan to grow offers you more variety. However, by combining them you could potentially benefit from both options.

In order to understand which type would be best for your circumstances, speak to an expert.

The advisors we work with are fully regulated by the Financial Conduct Authority and are independent, meaning that you will be getting the right advice from qualified experts.


What are the personal pension and annuity rules?

Once you reach 55, Pension Freedoms now allow you to:

  • Take out a 25% tax-free lump sum from your pot – regardless of whether you wish to buy an annuity or not
  • Make several withdrawals or withdraw it all (75% of which will be classed as taxable income)

New annuity rules were planned on being introduced in April 2017; however, those regulations were scrapped, so you can still expect tax charges between 55% and 70% if you withdraw from your annuity.

To find out what the rules around personal pensions include, read our guide.



What payments can I expect from an annuity?

How much you’ll receive from an annuity product or a personal pension scheme will vary depending on many factors, including the provider you choose, how much you have in your pension pot, when you start taking an income from your pot, your health and lifestyle, and many more.

For more information about how annuity payments work, read our in-depth article. 



What rates can I expect?

With annuities and personal pensions, there are many factors which could affect the rates and therefore determine your minimum income payments.

Some factors include:

  • Health
  • Age
  • The amount of money you put in

See our guide for more information about annuity rates.

For personal pensions, rates can vary greatly as each scheme will carry its own level of risk. The advisors we work with can go through your options with you to see which scheme can provide you with the best rates of return for your circumstances.


 Should I use an annuity calculator?

There are annuity calculators available online but they will only spit out a rough idea of what you might be able to get. If you do use one, take any answers with a pinch of salt and then talk to a qualified pension expert who can give you bespoke advice.

Working with a fully qualified financial adviser who specialises in pensions and annuities will be able to give you far more accurate figures and help you establish the best course of action for achieving the retirement income you desire.


 What’s a retirement annuity contract?

A Retirement Annuity Contract (RAC) is the formal name for a personal pension. It’s a special insurance contract which is approved by HMRC which allows tax relief on any contributions made. With an RAC you can get a tax-free lump sum along with a pension income or other benefits when you retire.

An RAC is usually a contract between you and a life assurance company. The ultimate value of benefits you can get from the contract will depend on the contributions you have paid, investment returns, how much you have paid in fees and charges each year and the cost of buying the eventual benefits.


Speak to an expert

Deciding whether to take out a personal pension annuity isn’t a decision that you should take lightly. By working with an expert pensions advisor, they can help you weigh up the advantages and disadvantages to see which option would be best for you and your financial goals.

Call 0808 189 0463 or make an enquiry and we’ll put you in touch with an expert for a free, no-obligation chat.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Book a free, no-obligation pension review today