Pension Annuities: The Right Way to Relax and Get Paid After Retirement?
- TBA
- Apr 16
- 4 min read
A pension is like a retirement salary card – it ensures you’re not solely relying on the State Pension (which, let’s be honest, barely covers cat food), but also have occupational/personal pensions to maintain your quality of life.
It protects against inflation and longevity, so even if you live to 100, you won’t see your account hit zero. Plus, you get to enjoy a few tax benefits along the way – because who wants to still be flipping burgers at McDonald’s at age 70?
Generally, there are two main ways to withdraw from your pension and maximise your annual return: pension drawdown and purchasing an annuity.
Pension drawdown means withdrawing directly from your pension while allowing the remainder to keep growing. Think of it as dipping into your pension savings pot, taking a bit out, and reinvesting the rest to receive a steady income. This typically applies to Defined Contribution pensions, such as occupational and personal pensions.
Then there’s purchasing an annuity. According to financial experts, annuity rates in the UK have reached a 15-year high. Data from Retirement Line shows that as of 11 April 2025, the average annuity rate for a 65-year-old is 7.26%. That means if you invest £100,000, you could receive £7,260 a year for life!
What exactly is an annuity? And who should consider purchasing one?
What is a Pension Annuity?
A pension annuity is an insurance product designed to provide a regular income after reaching retirement age.
It’s not for compensation of accidents or illness, but rather a long-term plan where the insurer pays you a regular pension once you hit retirement age, helping to support and improve your lifestyle in later years.
The income you receive depends on several factors, such as the value of your pension pot, your health, life expectancy, and other circumstances.
In simple terms, imagine you’re a lucky retiree, bundling your lifetime pension savings (from an occupational or personal pension) into a giant red envelope and handing it over to an insurance company.
The insurer grins and says, ‘Darling, sign this deal with the devil and I’ll give you pocket money every month – for life!’ That’s an annuity – trading a large upfront sum for a steady stream of income in future.
Types of Pension Annuities in the UK
There are three main types of pension annuities in the UK: Lifetime Annuity, Fixed-Term Annuity, and Flexible Annuity. Each comes with different payment methods, levels of risk, and target users.
Lifetime Annuity
Key Features:
Paid for life: After purchase, the insurer pays a fixed amount monthly or annually until the policyholder passes away.
No investment risk: The income is set at purchase and unaffected by market fluctuations.
Optional add-ons: e.g. joint life annuity (your partner continues receiving income after your death), or inflation-linked annuity (income rises with inflation).
Irreversible: Once purchased, it usually can’t be altered or cancelled.
Ideal For:
Risk-averse individuals: Those who want to completely eliminate longevity risk.
Those needing stable income: Particularly people without other pension sources.
Healthy retirees: Those expecting to live longer may receive higher overall lifetime income.
Drawbacks:
Inflexibility: You can’t adjust income or access the capital.
Inflation risk: If not linked to inflation, your purchasing power may erode over time.
Fixed-Term Annuity
Key Features:
Set term payments: Typically set at 5–30 years, fixed income during this period.
Maturity value: You may receive a lump sum at the end of the term or roll it into another pension plan (terms dependent).
Some flexibility: Some products allow income adjustment or early termination.
Locked-in rate: Income is fixed and unaffected by market interest rates.
Ideal For:
Mid-term planners: Those planning to switch to another income source (e.g. State Pension) later.
People needing a maturity lump sum: To cover large future expenses such as medical costs or travel.
Moderate risk tolerance: Willing to accept fixed income for a set period while preserving future options.
Drawbacks:
Term limitation: If you outlive the term, you must rely on other income sources.
Uncertain maturity value: Some maturity amounts are linked to fund performance and can vary.
Flexible Annuity
Key Features:
Adjustable income: You can change how much you withdraw monthly (within limits).
Market-linked: Some products invest your funds, so income may fluctuate based on performance.
Inheritance potential: Remaining funds can be passed to beneficiaries after death.
Hybrid approach: Combines features of annuities and flexible withdrawals (like UFPLS).
Ideal For:
Higher risk tolerance: Those seeking higher returns through investments.
Flexibility seekers: Want to adjust income as life circumstances change (e.g. health or family).
Estate planners: Those wishing to leave remaining funds to heirs.
Drawbacks:
Market risk: Poor investment returns may lower your income.
Longevity risk: Mismanagement could lead to running out of funds too soon.
Buying Tips
Lifetime Annuity: Best for those relying on annuities as their main income and who don’t want to manage their funds.
Fixed-Term Annuity: Good for bridging periods (e.g. until the State Pension kicks in) or for those needing a lump sum later.
Flexible Annuity: Ideal for those with some investment knowledge, wanting income control and inheritance options.
Special Features
Since 06 April 2015, retirees can treat their pension savings like a bank account – withdrawing a lump sum, taking partial withdrawals, or continuing to invest.
Tax Alert!
You can withdraw 25% of your pension pot tax-free (sweet!)
The rest is taxed as income – withdraw too much at once, and you could jump into a higher tax band (ouch!)
Annuity income is taxable (yes, HMRC is always watching...)
Some Advice from TB Accountants
When you're young, you work hard to pay into your pension. In retirement, the insurance company transforms into your personal ATM, transferring money to you monthly.
An annuity is like a post-retirement auto-renewable salary. Perfect for those who value stability and don't want the hassle of managing their finances.
But if you’re an investment wizard, a pessimistic lifer, or a compulsive spender – tread carefully!
