Getting the Best Income from your Pension Pot

18th April 2012

How do you turn your pension pot into the best income stream for you?

Not so long ago, one of the main arguments against having a pension was that you had to buy an annuity with at least 75% of your fund (25% can be taken as a tax-free lump sum). Annuities are no longer compulsory, but, while there are other ways to generate an income from your investment fund, remember that none of them are perfect. The decision as to whether to buy an annuity should be fully discussed with your financial adviser but here are some of the basic facts:

What are annuities?

When you buy an annuity, you hand over your pension fund to a pension provider in return for a regular, guaranteed income for the rest of your life. This income is taxable if it exceeds your personal allowance. But there are different kinds of annuities. You need to understand these when buying them.

Level Annuity

This provides a fixed income for the rest of your life. It will not change if prices go up. So in an inflationary world, the purchasing power of this type of annuity will go down every year.

For example, if inflation averages 4% per year, the purchasing power of your annuity income will halve in 18 years. If you die, the income paid from this type of annuity usually stops.

Increasing Annuity

If the thought of a level annuity is worrying, you could think about buying an increasing annuity. In this scenario, the amount of income can increase either by the inflation rate or a fixed amount each year.

Guaranteed Annuity

If you are worried about your insurance company keeping a large chunk of your pension fund should you die after only a few years of retirement, you could buy a guaranteed annuity.

For example, if you bought a five-year guarantee and you died after two years, your nominated beneficiary (say your husband or wife) would receive annuity income for another three years.

Joint Life Annuity

Another option is a joint-life annuity. This is where your partner can receive some or all of your pension income if you die before them.

Investment-Linked Annuity

If you are prepared to take a bit more risk, you could go for an investment-linked annuity. Here you start with an initial level of income while your fund is invested in an insurance company’s with-profits-fund. If the fund makes a profit, your income goes up. If it loses money, your income goes down.

Enhanced Annuity

The amount you receive will also be impacted by life expectancy, for example a smoker may be able to get an enhanced annuity, which will provide a higher income, as their expected life expectancy is shorter than a non-smoker.


As you can see the options are many. The choice is yours but as it affects your income in retirement, it will be worthwhile discussing the options with an experienced adviser who will not only be able to help you choose which annuity to get but can also help you find the best supplier.

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