How to maximise your pension with an annuity
Annuities are popular, and rates are good — but do shop around, advises Paul Lewis
Demand for annuities is growing. Nearly 90,000 people spent a total of £7 billion to buy one in 2024, the highest volume in a decade. An annuity is basically a simple product. You give an insurance company a large amount of money. In return it gives you a guaranteed income for life – however long that is.
Annuity rates are good just now, nearly two-thirds more than you’d have got a few years ago. A pension fund of £100,000 can buy a healthy 65-year-old a guaranteed income for life of around £7,700 a year. If you have ill health or you smoke, the amount you get will be higher.
Calculate how much more income you could get using this online annuity calculator
There are choices to be made. Do you want your annuity to be flat-rate for the rest of your life or to rise each year with inflation? That would make the initial payment about a third lower. Do you want a partner or heirs to continue to get the annual payment if you die within a few years?
You can protect an annuity for up to 20 years at relatively little cost – about £450 a year on a £100,000 fund for a healthy 65-year-old. But if you die within the 20 years, some of it may be liable to inheritance tax.
At the moment, pension funds are exempt from inheritance tax, but from April 2027 any pension fund that is still unused and is not left to a spouse or civil partner will face potential tax of 40 per cent. If you’re 75 or more when you die, your heirs – including a spouse – will also pay income tax when they take the money out. That means a total tax take typically ranging from just over half to around two-thirds of the fund, in some rare cases even more.
Calculate how much more income you could get using this online annuity calculator
The tax will apply from 6 April 2027 to any unused funds at death, including those in drawdown – a scheme where you take a regular income or irregular amounts from your invested pension fund. Buying an annuity means there is no money left in the fund to be liable to inheritance tax but annuities are taxable as income.
Information on these choices is free at moneyhelper.org.uk – search “annuities”, or call them on 0800 011 3797. If you ask a regulated adviser, make sure they are independent and an annuity specialist. There will be fees to pay.