UK pension annuities and tax-free cash
Before purchasing an annuity in the UK, you can withdraw up to 25% of your pension fund completely tax-free (Pension Commencement Lump Sum - PCLS). The remaining 75% is used to purchase the annuity.
Annuity income is treated as taxable earned income and taxed through PAYE according to your marginal income tax bracket.
Worked example: UK lifetime annuity
With a £100,000 pension pot, taking £25,000 (25%) tax-free cash leaves £75,000 to buy an annuity. At a 6.8% level rate with a 5-year guarantee, the initial guaranteed income is approximately £5,049 per year (£421 per month).
Inputs for the uk annuity calculator
Pot & Tax-Free Cash
Enter your total pot value and select whether to take 25% tax-free lump sum upfront.
Escalation & Joint Life
Choose between level payouts, 3% fixed escalation, or RPI inflation-linked income.
CALCULATOR QUESTIONS
UK annuity calculator questions
What is an enhanced or impaired life annuity in the UK?
If you smoke or have health conditions like diabetes or high blood pressure, providers offer enhanced annuity rates paying significantly higher monthly income.
How is UK annuity income taxed?
Payments are taxed as non-savings earned income via PAYE. Any tax-free cash must be taken before the annuity is set up.