Guaranteed annuity income.
Annual income
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Monthly income
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Tax-free lump sum taken
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What you are actually buying
An annuity converts a lump sum of pension savings into a guaranteed income that a life insurer pays you, usually for the rest of your life. You hand over the capital, the insurer takes the longevity and investment risk, and in return you get a cheque every month no matter how long you live or what markets do. This calculator works in the order the real decision happens. First it carves off the 25 percent tax-free lump sum, the pension commencement lump sum, then it applies your chosen annuity rate to whatever is left. The output is the gross annual and monthly income before any income tax.
That ordering is the part people get wrong. The annuity rate is applied to the pot after the tax-free cash comes out, not to the whole pot, so taking the full 25 percent always reduces the guaranteed income that follows. The tool is aimed at someone in their sixties weighing a secure income floor, and at advisers sketching a quick illustration before going to a proper quote engine.
A £300,000 pot at 6.5 percent, step by step
Take the default inputs: a £300,000 pot, the 25 percent tax-free cash taken, and a 6.5 percent annuity rate. The numbers below come straight out of the tool.
| Step | Amount |
|---|---|
| Pension pot | £300,000 |
| Tax-free cash (25%) | £75,000 |
| Used to buy the annuity | £225,000 |
| Annual income at 6.5% | £14,625 |
| Monthly income | £1,219 |
The chart shows where the £300,000 goes: a quarter out as a tax-free lump sum, the rest buying the income stream.
The income is taxable, and your rate moves
Annuity income counts as earned income and is taxed under PAYE through your tax code, exactly like a salary or the state pension. The £14,625 above is gross. Sit it on top of a full new state pension of around £12,000 and most of the annuity falls into the 20 percent basic-rate band once the £12,570 personal allowance is used, leaving roughly £11,700 net from the annuity in that scenario. The tax-free cash itself is the only genuinely tax-free part of the deal, which is one reason so many people take it in full even when they do not have an immediate use for it.
Why the rate you are quoted is not the rate here
This tool uses a single flat annuity rate so you can model scenarios, but a real quote depends on far more. Your age is the biggest factor: rates rise sharply through your late sixties and seventies because the insurer expects to pay for fewer years. Gilt yields drive the underlying pricing, so annuity rates have moved up substantially as interest rates rose. Then there are the options you bolt on, and each one lowers the headline rate. A level annuity pays the most today but loses spending power to inflation. An RPI-linked annuity starts lower but rises. Adding a spouse's pension or a guarantee period also trims the rate.
One practical tip that genuinely pays: if you have any qualifying health condition or you smoke, ask for an enhanced annuity. Insurers will quote a higher income on the same pot because your life expectancy is statistically shorter, and the uplift can be 10 to 30 percent. Never accept your existing pension provider's first offer without exercising the open market option to shop the whole market, because the difference between the best and worst quote on the same pot is routinely worth tens of thousands of pounds over a retirement.
Can I take some tax-free cash and annuitise only part of my pot?
Yes. You do not have to convert everything at once. Many people use a phased approach, buying a small annuity to cover essential bills and leaving the rest in drawdown for flexibility and growth. You can also annuitise in stages over several years to capture the higher rates that come with age. This tool models a single purchase, so run it twice if you want to split your pot.
What happens to the money when I die?
With a basic single-life, level annuity, the income simply stops on death and the insurer keeps the remaining capital. That is the trade for the guarantee. If leaving money behind matters, you can add a guarantee period of, say, ten years so payments continue to your estate if you die early, or buy a joint-life annuity that keeps paying a percentage to your partner. Both reduce the starting income, which is why drawdown, where the residual pot is inheritable, often appeals to those focused on legacy.