An annuity provides the security of a regular income for the rest of your life
You can buy an annuity from an insurance company. You can choose the type of annuity you want to match your circumstances and financial plans. Once you have bought an annuity, you can’t change it or change insurance company, so it’s worth taking the time to choose the right one. You can compare annuities yourself or you can use an annuity comparison service. HUB Financial Services (HUB) has been appointed to provide a comparison service for members of the Scheme.
Take up to 25% of your DC pension pot tax-free before you buy an annuity
When you retire and just before you buy your annuity, you have the option to take a tax-free cash lump sum (this is normally up to 25% of your Defined Contribution (DC) pension pot up to the Lifetime Allowance).
Pass it onto your loved ones
If you want your dependants or beneficiaries to receive an income or lump sum after you die you will need select these options when you buy your annuity.
Comparing annuities
If you decide to buy an annuity, you will need to choose the type of annuity that’s right for you and shop around to find the best value for money. You can get access to a guided annuity service through HUB Financial Solutions (HUB) as a member of the Scheme. When you are closer to retirement, WTW will automatically send you ‘Your Pre Retirement Pack’ containing information about various annuity benefit options available to you. HSBC will only pay for you to use this service if you are actually taking your
retirement benefits from the Scheme. It is not available if you are just considering whether or not to retire.
To help you to understand more annuities, take a look at some of the different annuity options available below:
An increasing annuity helps protect your income from inflation by providing an income which increases during retirement. It will start at a lower initial payment amount than a level annuity. You can choose either:
An income that increases at a set rate each year, for example 3% or 5% or;
An index linked annuity – this changes your income each year in line with inflation. Insurance companies often cap inflation increases and only allow your income to go up by a maximum percentage even if
inflation is higher.
A level annuity provides an income which stays the same throughout retirement. It may pay out more than an increasing annuity at the beginning, but its buying power could reduce over time if prices rise. It’s worth
thinking carefully about the impact of inflation in retirement. You may need to live on your retirement income for 20 years or more.
If you choose an annuity with a guaranteed period, an income would continue to be paid to your dependant or other beneficiary for a minimum term after you die.
An annuity with a guaranteed period pays an income which is guaranteed to be paid for a minimum period regardless of how long you live. A guarantee period is a form of protection that ensures that your income continues to pay out for a minimum term, even if you die within that term.
If you buy a ten-year guarantee for example, and if you die after seven years – payments will continue for another three years or a lump sum can be paid. If you die after the guarantee period you’ve selected, the income will stop – unless you’ve set up a joint life annuity.
If you choose an annuity with no guaranteed period, the income from this will stop when you die (or when you partner dies if you choose a joint life annuity). This will typically have a higher starting amount than an annuity which has a guaranteed period. If you die soon after taking out an annuity, you may not get back the amount you paid to the insurance company.
You’ll need to decide whether you want the annuity to continue to pay an income to your partner or another dependant after you die to determine whether to choose a joint life annuity or a single life annuity.
A joint life annuity is designed to provide an income to your spouse, or civil partner after you die. It can pay anything between 1% to 100% of the income that you were receiving immediately before your death. It will usually cost more to buy so it will usually be a lower staring amount than an annuity paid just to you, as it is expected to be paid for longer.
Some providers might not agree to set up a retirement income for a spouse or partner if they’re more than ten years younger than you.
A single life annuity pays an income which stops when you die. It usually pays a higher level of income than a joint life annuity.
You may be able to get a higher income if you have a reduced life expectancy.
A standard annuity provides an income which does not take into account your health.
An enhanced annuity provides an income which takes into account your health and lifestyle. If you are eligible, this type of annuity will typically have a higher starting amount than a standard annuity because it’s expected to be paid to you for less time. Providers assume you will not live as long as someone in full health.
Health problems that mean you could get a higher retirement income include:
Stroke
Cancer
Diabetes
Heart attack
Kidney failure
Chronic asthma
Multiple sclerosis
High blood pressure
High cholesterol
Some insurance companies also offer enhanced annuities to people who have worked in certain jobs. For example, those involving a lot of manual labour, or who live in certain areas of the country that have, for example, have lower life expectancies.
You’ll be asked medical questions before you’re offered an enhanced annuity. The insurance company might ask your doctor for more information or ask you to attend a medical examination.
Annuity income and tax
Your 'Personal Allowance' is the income you can receive each year without paying tax. Any tax-free cash you take from your annuity doesn’t count towards your Personal Allowance. Once you have taken your tax-free cash, your annuity income will be taxed as income. It is added to any income you have from other sources in the tax year for calculating the rate and amount of tax to be paid.
You can normally take up to 25% of your DC pension pot tax-free as a cash lump sum (up to the Lifetime Allowance) when you retire and just before you buy an annuity.
It’s up to you how much tax-free cash you take up to the maximum allowance, but you may want to think carefully about what you do with it. Don’t forget, inflation reduces the spending power of cash so you should think carefully before just leaving it in your current account for a long time.
What should I do next?
If you are thinking about taking your DC pension pot and would like to get a retirement quote or request a retirement pack, you can do this by logging-in to My Pension. Once logged in, select the Quotes drop down menu. Please note you can only request a retirement quote if you are aged 54 or over.
Have you attended a retirement seminar or watched a retirement webcast?
Our retirement seminars/webcasts are designed for active and deferred DC members aged 50 and over, to help you understand more about your retirement income options. Look out for your invitation from WEALTH at work. Click to watch the full series of Retirement webcasts for DC members over age 50.
Have you tried our Pension Freedom Planner?
If you want to find out more about how much retirement income you might get from buying an annuity, why not login to My Pension
and use the modeller called the Pensions Freedoms Planner.
Quick links to external help sources
If you need more help to choose an annuity, you can contact HUB (see above), or visit The MoneyHelper
to choose your own financial adviser.
Visit Pension Wise
and book an appointment to get more guidance before deciding whether Drawdown Income is right for you. Pension Wise is a free government backed service that offers impartial guidance for people with DC pension pots.
Whether you are about to take your Defined Contribution (DC) pension pot, or your retirement is a long way off, it’s worth understanding more about your benefit options.
