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?

An annuity provides you with a guaranteed income for the rest of your life - so you'll know exactly what you receive and when. This can help take away the worry of running out of money no matter how long you live.

 

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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 pot and where you live.

An Enhanced Annuity is likely to give you a higher annuity income. It considers health and lifestyle information, for example, if you have certain health conditions, are overweight or smoke, then you may qualify for an Enhanced Annuity. If you have an adviser, they should compare the rates we send to them and offer you the highest rate.

 

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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 of your 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 by a fixed percentage. For example you can decide that you want to increase it at 3% each year
  • You can add protections options to your annuity payments. We offer a range of choices so you can select what best suits your circumstance.


Things to consider

  • We’ll stop making payments when you die. You can add options which may provide income for a named dependant or beneficiaries after you die. Learn more about the options to protect income here.
  • 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, 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.
  • Once you've bought an annuity, you can’t change it. We’ll pay it for the rest of your life, even if your circumstances change. For example, you can't change a named dependant after the annuity is set up, even if your circumstances change.
 

Build your brighter tomorrow, today

The Scottish Widows app lets you connect your financial products in one place. It helps you check what you have today, so you can take steps to build your tomorrow. 

Learn more about our app

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Do I pay tax on my annuity income?

Annuity income is taxable. HM Revenue & Customs (HMRC) gives us your tax code, which tells us how much tax we need to take. We’ll take any tax due to be paid to HMRC before we make the payments to you.

Your first few annuity payments may or may not have tax deducted. That’s because HMRC need to give us your tax code. This means it’s likely that you’ll see changes in your annuity income after the first few payments.

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 currently £268,275.

If you have any questions about your tax code or the tax we’re taking, please contact HMRC on 0300 200 3300 or go to www.gov.uk/find-hmrc-contacts/income-tax-enquiries. You’ll need your National Insurance number if you call them.

 

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What happens to an annuity when I die?

Your annuity payments stop when you die. If you’re looking to give a dependant or beneficiary an income after your death, please have a look at the options for doing this. 

 

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How can I leave an income for a beneficiary?

Annuity payments will stop when you die. However, you may be able to leave an income after you die with these options:

  • Dependant’s Income -  a Dependants Income means we may pay a named dependant an income after you die. A dependant can be your surviving spouse, registered civil partner or another adult dependant. You can add Dependants Income for any amount up to 100% of your annuity income.
  • 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 may provide a lump sum to a beneficiary if you die earlier than expected. Customers usually choose to protect 100% or 50% of the amount they've used to buy the annuity. 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.

Terms and conditions apply to all options. We’ll explain these to you before you choose, so you can decide what’s best for you before buying.

 

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Does my annuity payment increase each year?

Your annuity payment will stay the same each year. Cost of living increases (inflation) may reduce what you can buy with an annuity payment which doesn’t increase each year. If you’d like an annuity income which does increase each year then you can choose to have your income:

  • Increase at a fixed rate each year, for example 3% a year. If inflation rises by a higher amount for example 5%, then you’ll still receive a 3% increase, if that’s what you’ve chosen.
  • Change each year in line with the Retail Prices Index. If the Retail Prices Index is negative, your income could go down. 

Increasing your annuity income payments is something you need to pay for, which means the starting income we pay you will be lower. If you do want your payments to increase, then you need to choose this option from the start when you’re buying the annuity.

 

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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 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, we'll ask you if you'd like us to compare our annuity offering with all other providers in the market. This will tell you if we can provide the highest annuity income or if another provider is higher. We'll need your permission to share your personal details, including any medical details, with other annuity providers. 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 have an existing pension product with us then 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.

 

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