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Planning Retirement Online

Annuities in laterlife


Annuities and Open market Options

What is an Annuity?

An annuity is the income paid to you for life by an Insurer in return for a lump sum paid to them either from your pension fund or your own capital. Until 2006 it was compulsory to buy an annuity by the age of 75, at the latest, if you had a private pension or if your company scheme was money purchase rather than final salary. Now, however, you don't have to buy an annuity although many people who want a guaranteed income for life probably still will. If you are a UK resident you can buy an annuity from age 55.

The 2015 budget has introduced radical changes which introduce much more flexibility including being able to take the whole of one's pension pot and invest it as you see fit, or being able to leave your pension funds invested and draw down income as required.  For more details visit our separate retirement planning and finance site


Whilst it's nice to retire, it’s even better, if you have a large enough income, to enjoy it! However, with real costs of living increasing faster than most pensions, now more than ever, it is important to ensure that you get the best income from your pension or the savings you have built up during your working life.

If you decide within the overall options provided by 'Pension Freedom' that a guaranteed income provided by an annuity is the right thing for all or part of your funds, legalisation now insists that all personal pension providers give you an Open Market Option - the right to shop around for the best annuity, before taking the benefits simply from your existing pension.

So before accepting the pension on offer from the company with which you have saved, seek advice and quotes from other companies, as you may be able to:

  • Improve the income provided
  • Benefit even more should you or your spouse suffer from poor health
  • Consolidate different small pension funds, to receive just one larger income, making budgeting easier.

When it comes to shopping around for the best deal, it’s worth considering arranging for an expert in this field to do it on your behalf.

You can provide an income just for yourself, in which case the income would stop on your death.  If you have someone else whom you would like to provide for - and if you are happy to accept a smaller pension for yourself - you can ensure that either your pension would continue for the balance of 5 or 10 years or provide for a spouse’s pension.  In the latter case, they would then continue to receive an income for the rest of their life, however long that proves to be. There are a variety of other options, for more details visit our separate retirement planning and finance site

What about Tax?

Pension Annuities are taxed at source through the PAYE system. Income tax is deducted at the basic rate. Non-tax payers can claim this back while higher-rate and additional taxpayers have to pay more through self-assessment.

Voluntary Purchased Life Annuities (VPLA’s) purchased from your own money, consist of two elements. The first is the return of the purchase money, which is tax free.  The other is interest paid by the provider for holding this money for you. This second part is taxed as unearned income at currently 20% for basic rate taxpayers with higher rate taxpayers paying 40% and additional rate taxpayers 45%. As the interest element decreases and the non- taxed capital element increases the older you take the annuity, this can be a very tax efficient income source.

Please note: Levels, bases and reliefs from taxation are subject to change.

Annuity / Open Market Options – Risk warnings

Purchased Life Annuities can be a very good way of securing a tax –efficient, guaranteed income, but may not be right for everyone.  So it is important to get Financial Advice.


If you are considering purchasing an annuity, take note of the following:

Once purchased almost all annuities cannot be cashed in at any time (although there are now proposals that may allow this from April 2016)

  • The real value of Level annuities will gradually be eroded by inflation over time.
  • Unless you can include a guarantee, a spouse's pension and/or annuity protection, there will be no benefit available to your estate on your death, and the amount received may have been less than the amount you used to buy the annuity with.
  • Once purchased, an annuity rate is guaranteed but as annuity rates are partly based on age, should you defer purchasing your annuity until you are older, better rates may be available.
  • Transfers of pension funds may take some time to be received by the recommended new provider if you have used the open market option. Therefore, the value of the existing fund may change, sometimes quite significantly, before being transferred. A final figure will only be confirmed once the transfer actually takes place.
  • Impaired rates quoted on the basis of medical information supplied by yourself are liable to change should the provider seek medical references and the information received from your doctor differs from the information supplied by you.
  • Income Tax rates are liable to change and may increase during the period you benefit from the annuity, leading to a reduction in net income received.

There is useful information available on the Pension Advisory Service web site at:




Retirement Planning - General guidance, Retirement Pension Planning, Inheritance Tax Planning - General guidance, Equity Release, Long Term Care, Making a Will, Annuities, Finding a Financial Adviser

Take a look at our overall section on retirement planning too.

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