Understanding annuities

As a member of the IWDC Section, there are a number of ways you can take your pension pot (known as your Personal Retirement Account). One option is to buy a secure, regular income, known as an 'annuity'. But what are annuities and how do they work?

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An annuity is a policy that you buy using money from your IWDC pot. The policy gives you regular payments and guarantees you an income for the rest of your life, or for a set period of time if it’s a fixed-term annuity.

Select from the questions below for more information.

An open wallet, with several £20 notes poking out

How much can you get from an annuity?

The income you can get with an annuity, depends on:

  • your age
  • how much money you have in your pension pot
  • the type of annuity you choose
  • the annuity rates at the time you buy your policy. This rate depends on a number of things, including your health and where you live

What types of annuity are there?

There are many different types of annuity to choose from. They offer different levels of income, and support for your dependents if you die.

Many will provide an income for life, but some only provide an income for a fixed period of time and would only cover you for a certain number of years.  

You can choose either a:

  • Single annuity – this gives you an income, for life or for a fixed number of years, but the payments will stop if you die and there will be no support for your dependents
  • Joint annuity – this gives you an income for life, or a fixed number of years. If you die the income payments will transfer to your spouse or another beneficiary. They will continue to receive a regular income until they die. It can also be used to pay a regular income to a dependent child, up to the age of 23.  

You can then choose if your income should increase or be a fixed amount each year.

  • Fixed income – this gives you exactly the same payments year in and year out. It is sometimes known as a level annuity. The payments will not increase in value.
  • Increasing income – your income will increase year on year. The increase can be for an agreed amount, e.g. a 5% rise per year, or in line with inflation. It is sometimes known as an escalating annuity. 

You also decide if you want to buy any extras, such as:

  • A guarantee payment – this means that if you have a fixed annuity rate and die before it ends, your policy will still pay out within a certain period. For example if you have a 20-year fixed annuity, but die after 15 years, the policy will still pay out an income or lump sum to your spouse or another named beneficiary for another 5 years.

Other options are also available. You can find out more in the Read as you Need guide to retirement options. 

What are the main advantages of an annuity?

Depending on what type you choose, an annuity could give you:

  • A guaranteed income for life, or for a fixed period of time
  • Peace of mind that an income will be paid to your spouse or dependants, even if you die  

You can also choose to take 25% of your pension pot (but no more than £268,275 unless you have a higher protected amount) as a tax-free lump sum and transfer the rest to buy an annuity.

What are the risks with an annuity?

  • The income you receive can depend on which provider you use and what type of annuity you opt for.
  • Once you’ve bought an annuity, it’s very difficult to change your mind, or to adjust your choices, even if your circumstances change.
  • Providers often charge an administration fee or other management fees for providing an annuity.
  • If you choose a fixed income annuity, you may find your money doesn’t go as far due to rises in inflation.
  • If you choose a fixed term annuity, this could run out before you die.
  • Scams – whenever you take money from your pension pot , and whatever option you choose, you should be aware of the risk of scams and proceed with caution. Find out how to protect yourself on the scams page. 

Is an annuity right for you?

You can use the Retirement Modeller in your  myRPS account, to get estimates showing what income you may get from different annuities, such as:

  • a single annuity
  • a joint annuity
  • a fixed-term annuity
  • in increasing income annuity

This could give you an idea of which annuity might work best for you, based on your personal circumstances.

Log in to try the modeller now.

You may also wish to speak to an Independent Financial Adviser (IFA) before making any final decisions.

Liverpool Victoria (LV) has been chosen as the official partner to give Railways Pension Scheme members access to financial advice. LV can be contacted on 0800 023 4187.  

You are still free to choose your own Independent Financial Adviser (IFA). You can find an IFA in your area on the Unbiased website.

How do you get an annuity?

The Railways Pension Scheme does not offer annuity options directly.

So if you’re considering this option, you will need to transfer your pension pot to another provider who offers annuity options. It’s important to shop around to find the best options to suit the lifestyle you want in retirement.  The income you will receive, the additional features and the fees you need to pay, can vary widely from provider to provider.  There may also be different terms for eligibility. 

MoneyHelper offers an annuity comparison tool to help find the right provider for you. You can use that for free or you can speak to a financial adviser or annuity bureau to get them to search the marketplace for you.

Are there alternatives to an annuity?

If you feel an annuity isn’t right for you, then you can consider:

You can read more about your options on the how I can take my IWDC pot page.  

What to read next...

Understanding drawdown

Learn about how you can take your IWDC pot bit by bit as a flexible income. This is known as drawdown.

 

Understanding encashment

Learn more about taking your entire IWDC pot as a cash payment. This is known as encashment.

Your Retirement Modeller

Log in to your myRPS account and find the Retirement Modeller under 'My Library' to see what your Personal Retirement Account could be worth when you take it, and your options for how you take it.