Annuities Explained – Annuity Rates – Annuities and Tax
Around 80% of people retiring choose an annuity to provide their income in retirement. It pays you a guaranteed income. The income is paid for as long as you live, rather than a set number of years. There is no investment risk (unless you have requested an investment linked annuity).
It can provide an income for your partner too (spouses/widows benefit ), if you die first , and can also protect your income against the effects of inflation (escalation ), as even a low level of inflation could greatly reduce your spending power over the years. You can choose the frequency of your payment and if you require any guarantee periods in the event of your death.
However you have to remember that with an annuity, you can not change it once it is set up. If the annuity is set up on your life only it will stop on your death, it is therefore not suitable for everyone.
Annuity Rates
The amount of your annuity will depend on the annuity rates applicable at the time you retire. The annuity you will receive will be individual to you and will depend on various factors including, how long people are expected to live for, fixed interest bond yields, how much you are investing, your age and health. It will also depend on whether you are male or female.
So it is worth shopping around. Studies show that the rates on offer from all the different annuity providers can vary as much as 30%.*
To put that in to context, if the top company was prepared to pay you £5000.00 each year, the bottom company may only offer £3500. Think what a difference that £1500 could make to you!
Annuities and Tax
Annuity payments are treated as earned income and as so are taxed at your standard rate under the PAYE system. Your income will paid to you net of tax, the annuity provider will pay the tax direct to the Inland Revenue on your behalf. To begin with they will take off basic rate tax until they receive confirmation of your tax rate.
*Source – The Pensions Institute and Accessibility Report March 2006