There are two key pension options many will be exploring for retirement: annuities and drawdown. While drawdown has increased in popularity since the introduction of pension freedoms, annuities may be set to make a resurgence.
This is particularly the case given annuity rates have risen at the fastest pace in more than 30 years.
An annuity involves a person using their pension saving to purchase a guaranteed income for life.
With providers now paying out thousands of pounds more to new pensioners, this option could have much more of a draw.
Annuity rates have been on the up for a number of months, after a long period of decline.
There are various types of annuity available, but which one a person picks is dependent on income, risk and other personal factors.
When individuals use money from their pension pot to buy an annuity, they can take up to a quarter of the amount as tax-free cash.
Individuals can then use the rest to purchase their annuity, with the income they get taxed as earnings.
In this sense, those who hold annuities have recently been urged to check their tax status and code.
This is because some will be paying more tax than they are actually required to.
If a person’s income is below their personal allowance, they should not be taxed for annuities, but sometimes individuals still are.
Bradley Post, CEO of RIFT Tax Refunds, said: “HMRC has a lot of taxpayers to keep track of and while they’re not in the business of deliberately charging, mistakes are part and parcel of life.
“With the cost of living rising so dramatically, it’s more important than ever to double-check that you’re not paying more than you rightfully should.
“While certain professions or aspects of working life are more likely to be due a refund, you never know just how much you might be owed.”