This is known as an annuity.
A retirement annuity can give you a guaranteed income for the rest of your life. You can also choose to receive an annuity for a fixed number of years. You pay tax on this income in the same way you do with your salary.
Buying a retirement annuity can give you peace of mind, because you’ll know exactly how much money you’ll be getting each month. It can help with budgeting for your living costs in retirement.
Of course, you’ll need to have built up a pension pot first. It’s never too early to start planning for your retirement to make sure you can enjoy the standard of living you want after you stop working.
If you haven’t started saving for retirement yet, you’ll need to take steps to make sure you have enough money when you stop working.
Explore: Planning for your retirement
The total amount you can get will depend on a few things like:
When buying an annuity, you can choose to use all or only some of your pension pot. You can take the first 25% of your pension as a tax-free lump sum first. The remaining balance is used to buy a guaranteed regular income. You pay income tax on these payments.
Choosing the right type of annuity for your needs is important. With some types, once you’ve committed to buy, you can’t change your mind later.
If you want peace of mind that the money in your pension pot won’t run out, a lifetime annuity might be a good option for you.
By choosing this, you receive a guaranteed income for the rest of your life.
With a lifetime annuity, you don’t have to spend all the money on it, but once you’ve bought one, you can’t change your mind.
A fixed-term annuity will pay you a set monthly amount for a fixed period of time. This could be anything from one to 40 years. It’s most common to choose between 5 and 10 years.
The money you spend on your annuity will be invested during the fixed-term period. At the end of the term, you’ll get a lump sum back. This will be for the amount you paid plus any interest from the investment, minus the amount you’ve received in payments.
Annuities linked to investments can offer a higher rate of return than other types of annuities. However they come with a higher risk that you might not get back as much as you put in. The value of the annuity is tied to an underlying portfolio of investments. Investments can go up as well as down, so it’s a good idea to take advice from a qualified adviser before committing to anything.
The income you get from an investment-linked annuity will depend on:
An enhanced annuity is aimed at people who have a life-shortening illness or health problem.
You might be able to get a higher income if you've had a stroke or a heart attack or have been diagnosed with serious conditions such as cancer, kidney failure or multiple sclerosis.
In these cases, you could be offered a higher annuity rate based on your life expectancy.
What happens when you die depends on type of annuity you have.
For example, a lifetime annuity is essentially a contract to pay you a guaranteed income. After this, the annuity provider simply stops paying that income.
Many providers offer extra features which mean your loved ones can still benefit from your annuity after you die.
For example, you can buy a joint life annuity. You will be paid a guaranteed income for the rest of your life. If you die before whoever you choose as the joint life, they will begin to receive a proportion of your income. A 50% joint life annuity is most common, but you can choose other percentages.
You could opt for a guarantee period, which makes sure payments continue for this time even if you die during the term.
There’s also the option of value protection. This is extra cover you can add to an annuity to pass on the value of your annuity to your loved ones, not including any payments you’ve already received.
Any money left to your loved ones from a pension currently doesn’t form part of your estate, like your savings or property do.
From April 2027, it’s proposed by the government that unused pension pots and death benefits will be included in your estate for inheritance tax. This will include the features mentioned above.
