Annuities

Here we explain

What is an annuity?

Types of annuities

How do annuities work?

Tax and annuities

Annuities and death

Annuity protection

Annuities and inflation

FAQ’s

 

Deciding what income to take in retirement or semi-retirement is probably one of the most important financial decisions you’ll make.

When you reach 55, you’ll have the option to buy an annuity with the money in your pension savings. From 6th April 2028, you’ll need to be 57 or over.

 

What is an Annuity?

What is an Annuity?

An annuity provides you with a guaranteed income for the rest of your life – no matter how long you live. This can help take away the worry of running out of money in later life.

 

      Back to top  >

Types of Annuities

Types of Annuities

Scottish Widows offers two types of annuities: Standard and Enhanced.

A Standard Annuity means the amount of income you receive is based on the average life expectancy of a person your age, the value of your pension and where you live.

An Enhanced Annuity is likely to give you a higher income in retirement if your health or lifestyle may reduce your life expectancy. You could qualify if you have certain medical conditions or lifestyle factors such as smoking or being overweight. This type of annuity reflects your personal circumstances. If you’re working with a financial adviser, they can compare quotes to help you find the best available rate.

 

      Back to top  >

How do Annuities work?

How do Annuities work?

Before you buy an annuity, you can usually take up to 25% of your pension savings as tax-free cash. The remainder, (or your whole pension pot), can be used to buy an annuity. This will pay you an income for the rest of your life.
 


Benefits of an annuity

  • It’s a guaranteed income for the rest of your life
  • An annuity doesn't have any investment risk to you
  • You can tailor the annuity to suit your needs
  • You can choose to receive the same amount for the rest of your life or have it increase over time in line with inflation or increase as a defined percentage. For example you can decide that you want to increase it at 3% each year
  • You can add protections so that your payments are protected for a dependant after you die.


Things to consider

  • We’ll stop making payments when you die. You can add protections so that we continue payments to a dependant after you die. Learn more about protecting your payments.
  • The cost of living generally increases over time, so £10,000 today might not buy you as much in the future. This is called inflation. For example, this means an income of £10,000 a year usually buys less each year if the price of household goods increases. You can protect your annuity income against inflation. Learn more about protecting your payments against inflation.
  • When you buy an annuity, you can’t change it. We’ll pay it for the rest of your life, even if your circumstances change.

 

      Back to top  >

Do I pay tax on my annuity income?

Do I pay tax on my annuity income?

Annuity income is subject to income tax. HM Revenue & Customs (HMRC) will tell us your tax code and we’ll use this to work out how much tax to deduct. You'll pay tax on any income above your personal allowance and we'll deduct any tax due from your annuity income before we pay you.

You can usually take up to 25% tax-free cash from your pension savings before you buy an annuity. The maximum amount of tax-free cash most people can take is £268,275.

Your tax treatment will depend on your circumstances. Tax rules may change in future.

If you have any tax queries, please get in touch with HMRC or a tax adviser.

 

      Back to top  >

What happens to an annuity when I die?

What happens to an annuity when I die?

Annuity payments stop when you die, unless you have chosen to protect your income with a Dependant’s Annuity, Guaranteed Payment Period, or Value Protection (lump sum payment).

 

      Back to top  >

Can I protect the value of my annuity?

Can I protect the value of my annuity?

You can protect your annuity payments with the following three options:

  • Dependant’s Income - a dependant’s income allows the annuity payment to be paid to a dependant after you die. A dependant can be your surviving spouse, registered civil partner or another adult dependant. You can protect up to 100% of your annuity payments.
  • Guaranteed Payment Period - if you choose a guarantee period then we’ll pay your annuity for a guaranteed period up to 30 years to your next of kin or your estate. This protects your annuity payments if you were to die earlier than expected. Some people choose a 5 or 10 year protection option.
  • Value Protection - this provides a lump sum to a named dependant if you die early. Customers usually choose 100% or 50% of the purchase price of their annuity to be protected. This option is only available through an adviser or an intermediary.

You can take either a Guaranteed Payment Period or Value Protection – you can’t choose both options.

 

      Back to top  >

Do annuities increase with inflation?

Do annuities increase with inflation?

Your annuity payment will stay the same each year. Cost of living increases, (inflation), may reduce what you can buy with a fixed amount annuity income. If you’d like your annuity income to increase each year you can choose to have your income:

  • Increase at a fixed rate each year (for example, 3%)
  • Change each year in line with the Retail Prices Index. If the Retail Prices Index is negative, your income could go down.

Protecting your payments from inflation does come at a cost and your starting income will be lower.

 

      Back to top  >

Frequently asked questions

Frequently asked questions

  • To calculate what you could get in retirement, we recommend looking at the pension calculator from Money Helper, this will give you an indication of your pension income in retirement.

  • Our charges are included when we calculate your income. Any financial adviser charges for advice can be paid to your adviser from your pension plan.

  • Many people will shop around for car and home insurance to get the best deal for them. You can do the same before you buy an annuity with your pension pot. You don’t need to buy an annuity with us, even if you have saved money into your pension pot with us.

    If you're an existing customer, if you ask then we’ll also look at other pension providers and tell you if they’ll give you a better deal than we can. We’ll need your permission for us to share your details with other pension providers. You can also shop around yourself or pay for an adviser to help you. You can also look at MoneyHelper to find out more information.

  • Many people underestimate how long they’ll live. If you retire at 67, then your pension payments may need to last 20 years or more. An annuity will provide you with an income, regardless of how long you live.

    Have a look at the Life Expectancy Calculator from the Office of National Statistics to see how long you might live.

    • If you are an existing customer with us, you can apply for an annuity directly from us
    • If you’re not a customer with us, you can buy an annuity with us through a financial adviser or intermediary
    • You must have a pension fund of at least £10,000 (after you take tax-free cash) and you must live in the UK or Northern Ireland (this doesn't include Channel Islands or the Isle of Man).

    • If you’re aged 55 to 99 you can buy a Standard Annuity
    • If you’re aged 55 to 85 you can buy an Enhanced Annuity

    From April 2028 the minimum age for both will change to 57 years old. You may be able to take it earlier if you have a protected pension age.

    Some of our pension plans need you to take retirement benefits or transfer to another plan by the age of 75. If you have a pension with us and you’re interested in taking an annuity, please call 0345 835 6644.

  • You can decide to have your annuity paid monthly, quarterly, six monthly or yearly. We can make the payments in advance, which is as soon as the policy is set up. Or you can choose to have payments made in arrear, for example, for monthly payments the first payment would be made one month after your annuity is set up.

  • Choosing how to take your money is a big decision. Pension Wise from MoneyHelper is a free and impartial service that helps you understand your options for using your pension. It’s a government organisation that offers clear guidance online or over the phone. To find out more or book an appointment visit MoneyHelper or call 0800 138 3944.

    If you’re unsure or need more help to make sure you know which option is right for you, we recommend that you speak to your financial adviser. If you don’t have one, you can visit unbiased.co.uk to find one. Advisers will normally charge for their advice.

 

  Back to top  >