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Use your pension pot to buy a guaranteed income for life

Although the new flexibilities offered by the 2015 pension reforms look attractive, for many people, a traditional annuity will still provide a good solution in retirement.

Purchasing an annuity offers some certainty as to income levels, and surety of payment.

An annuity can be purchased from an insurance company, with all or part of your pension pot, and can take various forms. It does not have to be bought from your pension provider, and in fact it is important to shop around to ensure that you are getting the best value for money. If you have certain health issues, or you are a smoker, it may also be possible to secure a higher level of income.

You have the option to take up to 25% of your pension pot as tax free and use the remainder to buy an annuity.

You can choose an income that;

  • is paid for your life, and that of a dependant in the event of your death
  • is guaranteed to be paid for a specific period of time, even if you die during that period
  • is either level or increases over time
  • is linked to an investment, so that your annual income fluctuates based on the returns of that investment

Annuity

AdvantagesDisadvantages
Simple and easy to understand. No ongoing reviews requiredAnnuity rates are currently low. If annuity rates go up you can't take advantage of the change
Income is secureLack of flexibility - once set up it cannot be changed
Income will never run outCannot take account of changing circumstances
Income in not affected by stock market falls (unless you buy and investment-linked annuity)Cannot take advantage of stock market rises (unless you buy an investment-linked annuity)
Some medical conditions can increase income paidIf level income is selected, the real value of income may be eroded over time due to the effect of inflation

When deciding on the right course of action for you, it is important to get guidance and, if appropriate, advice.

You can get guidance to help you understand your pension options from Pensionwise.gov.uk, a free and impartial Government service.

Regulated financial advice can also be sought to help you decide how to take your pension. At Wesleyan we're here to help and our financial consultants will help you find the solution that's right for you.

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