1. YOUR HANDY GUIDE TO
UNDERSTANDING
PENSION
ANNUITIES
How to turn your pension fund
into an income – for life

2. Before you can draw your
pension, there are some
things you need to know.

3. Many people think that when they retire, their pension fund will
automatically start paying them a well deserved income. However,
the truth is that when you reach retirement age, you will have to
decide how to convert your pension fund into a regular income.
This handy guide from Prudential is all about annuity options. It will show you how
you can use your pension fund to buy an annuity that will give you an income for life
– no matter how long you live.
There are many different types of annuities, all with their own pros and cons. We’ll
show you what your choices are, so you can start to think about which one will be
best for you when the time comes. That way you’ll be able to make an informed
decision in order to secure a comfortable income in retirement.
And if you have any questions, we’re always here to help.
3

4. YOUR WAY ANNUITIES EXPLAINED
Page
AROUND THE GUIDE 1 What is a pension annuity and 6
why should you buy one?
2 Why an annuity makes sense 7
THINGS TO CONSIDER
Page
3 The effect of inflation on your 8
retirement income
4 If you have more than one pension 9
Information in this handy guide
is based on our understanding of 5 A tax-free cash lump sum 10
current taxation, legislation and HM
Revenue & Customs practice, as at
6 How your partner, health and other 11
June 2007, all of which are liable to
factors can influence your decision
change without notice. The impact 7 How much will you actually need 12
of taxation (and tax relief) depends in retirement?
on individual circumstances.
4

5. MAKING YOUR DECISION AND FINALLY
Page
8 Types of annuity 14 Index of key terms 26
9 Find out where you currently stand 18
10 Key steps to taking your 20
pension income
11 It could pay to top up your pension 22
TAKING ACTION
Page
12 What to do now 25
5

6. 1 WHAT IS A PENSION ANNUITY AND WHY
ANNUITIES EXPLAINED
SHOULD YOU BUY ONE?
When you pay money into a pension during your WHEN YOU CAN START TAKING PENSION INCOME
working life, you build up a fund. If you have a
Many schemes let you take your pension income any
‘Defined Benefit’ or ‘Final Salary Pension Scheme’,
time between ages 50 and 75. However, new pension
your fund will automatically begin to pay you a
rules, due to come into effect on 6 April 2010, will
regular pension when you retire.
increase the minimum age to 55.
If, like many people, you have another sort of
When you first took out your personal pension plan or
scheme (usually called a ‘Defined Contribution
retirement fund, you probably nominated a specific
Scheme’) then a few weeks before you retire you
retirement age. If so, it’s unlikely you would
will have to decide how best to use your pension
be held to that. But if you’re retiring early,
fund to provide you with a regular income. Of
check that it won’t cost you anything
the options available, the most popular choice
as some older pensions have penalty
by far is to buy an annuity. This guide helps you
clauses.
understand your annuity options.
An annuity is a form of insurance which guarantees
to pay you an income for life – no matter how long
you may live. So you need never worry about your
income drying up. This makes it safe and secure
and gives you peace of mind.
6

7. 39,000
predicted
2 WHY AN ANNUITY MAKES SENSE
ANNUITIES EXPLAINED
No-one knows what the future holds, which can make
it difficult to plan ahead. However, people are living THE GROWTH IN
longer and enjoying a more active retirement. Which is THE NUMBER OF
why an annuity is so attractive because it guarantees to CENTENARIANS
pay a regular income, no matter how long you live. So IN THE UK**
UK
even if you live to be 105 you can rest assured that the
money will keep coming in. over
Statistics show that 18% of today’s 65-year old men 6,000
and 31% of today’s 65-year old women will live under
into their 90s* In the 1960s there were fewer than
. 300
300 centenarians, yet in 2004 there were more than
1960s 2004 2036
6,000 people over 100 years old in England and Wales,
and by 2036 this number is predicted to increase to
*Source: www.lifetwo.com **Source: Economic and Social
39,000**. Good news, bad news: Majority Research Council (ESRC),
of retirees underestimate life Swindon, page 32. (Accessed
Figures like this demonstrate why securing an income expectancy, October 2006. 16 January 2007). Stewart, I.
for life is vital. Annuities can provide the security of an and R. Vaitilingam (eds) (2004)
Seven Ages of Man and
income for life. All you have to do is choose the right Woman: A Look at Life in Britain
annuity to suit your individual circumstances. in the Second Elizabethan Era.
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 7

8. 3 THE EFFECT OF INFLATION ON YOUR
THINGS TO CONSIDER
RETIREMENT INCOME
The cost of living in retirement is higher than you
may think. In the early years you will almost certainly
take up new hobbies or devote more time to old ones.
You may also want to travel more, and visit friends and
relatives abroad. Then as you get older and start
spending more time at home, you may find that your
utility bills rise.
The increased cost of living, combined with the
fact that you can expect to enjoy an average of 22
years in retirement, means that an annuity that has the
potential to increase your income over the years may be
most suitable. Even if the Bank of England achieves its
2% inflation target, £1,000 in today’s money will be
worth only £647 in 22 years’ time. The good news is that with an annuity you have various
options that can make sure your retirement income
increases in line with inflation. We’ll explain these in
more detail later on.
8

9. 4 IF YOU HAVE MORE THAN ONE PENSION
THINGS TO CONSIDER
Over the years you may have worked for a few different
companies and paid into more than one pension with
different providers. In this case you may want to
combine your total fund value into one annuity. ANNUITIES ARE BELIEVED
TO DATE BACK TO
This could maximise your potential income, as some ROMAN TIMES
types of annuity require you to invest a minimum
Annuities have been around for
total fund value. However, you will need to some 2000 years and began in
check each pension you have to see if this ancient Rome*. Outside the state
is possible – and financially beneficial. pension, annuities are the most
common form of pension income
in the UK today**.
* Early History of Annuities,
Annuity Museum, April 2007
**Source: Winning Strategies,
What Investment, March 2006
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 9

10. 5 A TAX-FREE CASH LUMP SUM
THINGS TO CONSIDER
Normally you can take up to a maximum of
25% of your pension fund as tax-free cash. This
means you will receive around 25% less income from
your annuity.
If the total sum of all the pension funds you hold is
Before you start taking an income from your less than £16,000*you can withdraw it all as cash
pension fund, you have the option of taking a between the ages of 60-75. However, you must
tax-free cash lump sum from it first. withdraw all your funds in a single 12-month period.
If you do, you’ll obviously receive less income from your You will be able to take 25% of the total fund as tax-free
annuity, but will come away with cash that you can use to cash, while the remainder will be taxed as income.
boost your pension income in other ways. For instance,
*Correct for tax year 2007/8
you could put your capital into tax-free or tax-efficient
savings or investments vehicles. This will give you easy
access to your funds for a special treat or for a ‘rainy day’.
Meanwhile your tax-efficient funds will continue to
gain interest.
10

11. 6 HOW YOUR PARTNER, HEALTH AND OTHER FACTORS
THINGS TO CONSIDER
CAN INFLUENCE YOUR DECISION
Like many people, you may want to ensure that your
partner can continue to benefit from your pension
if you die before they do. You can choose an annuity
option that will ensure they can – though it means your
income will be lower.
Or if you suffer from poor health or have a long-term
medical condition, you may feel that you will never
receive the full benefit of an annuity. However, this is
one instance where poor health can actually work
in your favour. For instance, Prudential may pay you
a higher income if you have a qualifying serious medical
condition. So it is important that you highlight this to us.
From ill health to inflation, there is an annuity specially
designed to meet your needs.
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 11

12. 7 HOW MUCH WILL YOU ACTUALLY NEED
THINGS TO CONSIDER
IN RETIREMENT?
Thanks to new found leisure time, you may find yourself MONEY CHECKLIST
spending more money than anticipated. Or you may
You may want to use the checklist on the page
discover that staying at home means higher bills –
opposite to help you estimate the amount of
especially for gas, electricity and telephone.
income you will need.
You also need to think about whether you:
want to replace any employee-benefits you might
lose (e.g. a company car, mobile phone, medical
AT insurance, etc.) and how much will it cost
N ISN’T
UESTIO IRE,
“THE Q TO RET may receive extra money in the future (e.g. maturing
I WANT
WHA T AGE INCO ME” insurance policies, endowments, bonds, investments,
WHAT
IT’S AT 49)
(19 sale of a property or business, inheritances, etc.)
n
Forema
George
would be willing to use or dip into your capital
(eg. investing it for income, downsizing your home,
releasing equity from your home, selling assets, etc.)
to supplement your pension income.
12

13. MONEY CHECKLIST ESTIMATED VALUE OF ASSETS IN RETIREMENT
THINGS TO CONSIDER
Savings / Investments £
Your home (less mortgage) £
EXPECTED MONTHLY EXPENDITURE Other property / business interests £
Current monthly expenditure £ Potential inheritances £
Total new expenditure once you £ Total wealth (in retirement) £
retire (e.g. extra heating costs,
health plan, car expenses, etc.) SOURCES OF INCOME Monthly amounts
Less total expenditure that will £
Income from savings or investments £
stop or reduce when you retire
(e.g. rail fare, petrol, lunches, etc.) Your private/company pension £
Total per month (in retirement) £ Your partner’s private/company pension £
Basic (old age) state pension £
ONE-OFF EXPENSES IN RETIREMENT
Additional state pension or other state £
Total required for one-off expenses £ pension or pension income
(eg. replacing a company car, planning
Earned income from post-retirement work £
the trip of a lifetime, installing a new
kitchen or bathroom, moving home, etc.) Income from equity released from £
You may have some tax-free cash your home
from your pension that you could use
Other income (eg. rental, property/trusts) £
Total expected income £
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 13

14. 8 TYPES OF ANNUITY
MAKING YOUR DECISION
There are many types of annuity and pension
income options to consider, and on the following
pages you will find an overview of the main ones.
Whether or not your current pension provider offers
you an annuity at retirement, remember that you’re free
to shop around for the most appropriate solution. So just
before you retire, make sure you ask the Prudential or
your Financial Adviser for more information so you fully
understand all your options.
You can also get more information at
www.pru.co.uk/annuities.
ONCE YOU KNOW YOUR ANNUITY OPTIONS
It’s important to understand that once you have
bought an annuity you can’t change your mind, so
you need to be sure you’ve made the right decision.
14

15. 8
MAKING YOUR DECISION
TYPES OF ANNUITY continued B CONVENTIONAL ANNUITY WITH
INCREASING INCOME
As its name suggests, this option allows you to
A CONVENTIONAL ANNUITY WITH choose an income that will increase over the years.
LEVEL INCOME The amount of the increase can be set at a fixed
percentage each year, or linked to inflation.
This basic type of annuity guarantees to pay you
an income for life. It also guarantees the amount it ADVANTAGES:
will pay. The income will be fixed from the start Guaranteed income that will increase in line
and will not change until you die. with the Retail Price Index (RPI), or by the
fixed rate chosen.
ADVANTAGES:
Guaranteed income that will stay the same. DISADVANTAGES:
Lower starting income than Level and
DISADVANTAGES:
With-Profits annuities.
The purchasing power of your pension income If you choose a fixed percentage increase,
will be eroded by inflation over time. your income might become eroded by inflation
No possibility of increases in income. over time.
Once selected, it cannot be changed. Once selected, it cannot be changed.
If you choose to fix it with the RPI, and inflation
is negative, your income will go down.
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 15

16. 8
MAKING YOUR DECISION
TYPES OF ANNUITY continued
C WITH-PROFITS ANNUITIES ADVANTAGES:
A With-Profits annuity can be arranged to produce Guaranteed minimum income.
a similar income as a Conventional Level annuity. Potential for increases in income, based on
If investments are poor, your income may fall. fund performance.
However, it will never fall below a guaranteed, Potential to keep pace with or even outpace
minimum level. So With-Profits annuities involve an inflation.
element of risk – and potential reward. Some (like the Prudential With-Profits annuity)
allow you to convert to a Level or Increasing
Your choice of starting income will determine the
Income Conventional annuity if you change
level of risk you are taking – the lower the income,
your mind.
the less risk there is. Conversely, the higher the
income the more risk there is that your income DISADVANTAGES:
could reduce in the future. Your income can reduce in years of poor fund
performance, although not below a minimum
guaranteed income level.
16

17. 8
MAKING YOUR DECISION
TYPES OF ANNUITY continued
D UNIT-LINKED ANNUITY ADVANTAGES:
Here you can choose to link your retirement Potential for increases in income, based on
income to the value of an underlying investment fund performance.
fund. The fund can be low, medium or high risk Potential to keep pace with or even outpace
(depending on the offering of the provider). inflation.
Some allow you to convert to a Level or
Usually the more risky the underlying fund, the more
Increasing Income Conventional annuity if
your retirement income may increase – or decrease.
you change your mind.
Also, most Unit-Linked annuities do not come with
a minimum income guarantee. DISADVANTAGES:
Income can fall.
Often there is no minimum guarantee.
Highest risk annuity option – entirely
dependant on investment returns.
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 17

18. 9 FIND OUT WHERE YOU CURRENTLY STAND
MAKING YOUR DECISION
When pulling detailed figures together we suggest
that you (and your partner, if appropriate) get STATE PENSIONS AND BENEFITS
up to date valuations for all your: You can find out about these on the Department for
Work and Pensions’ website www.dwp.gov.uk
private or company pensions
The Government is setting up pension centres
state pensions and benefits round the country to help retired people.
savings and investments (both their capital value To see if there’s one near you, visit
and average yearly income/interest) www.thepensionservice.gov.uk
loans, mortgages, credit cards and other debts.
LITTLE OR NO PENSION
IS If you have low pension income, you could be eligible
AT 65
EMENT 65 for pension credit or other state benefits. To find out
“RETIR I WAS
WHEN
LOUS. ” about these, contact your local pension centre or social
RIDICU IMPLES
HAD P
I STILL 96)
96-19
security office, or visit www.thepensionservice.gov.uk
8
Burns (1 where you can search for local sources of help.
George
18

19. 9
MAKING YOUR DECISION
FIND OUT WHERE YOU CURRENTLY STAND continued
DIVORCE AND YOUR PENSION
LOST TRACK OF ANY PENSIONS?
When couples split up, division of their pensions is
If you’ve lost touch with your pension provider,
usually decided at the time of the divorce. This
it’s important to make contact and let them know
where you are. used to be called pension splitting but is now known
as pension sharing.
If you don’t know how to trace them, the Pension
Schemes Registry may be able to help. Alternatively, pensions can be earmarked for division
Call 0845 6002 687 or visit at retirement. If this applies to you, remember to take
www.thepensionservice.gov.uk it into account and let your current and new provider
know – as it will affect your annuity quotes.
“I’M LIV
ING SO
MY INC FAR BE
OME T YOND
ALMOS HAT W
T BE S E MAY
AID TO
LIVING BE
APART
E E Cumm ”
ings (18
94-1962
)
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 19

20. 10 KEY STEPS TO TAKING YOUR PENSION INCOME
MAKING YOUR DECISION
The following timetable and checklist will help TIMETABLE OF EVENTS
make sure you get the pension income that best
As the time draws closer to retirement, you can check
meets your needs.
with your pension provider and/or chosen annuity
provider to see how long things will take. Until then,
these approximate timings may help you draw up a
plan of action.
12 MONTHS 3-6 MONTHS 8-10 WEEKS
OR MORE BEFORE BEFORE BEFORE
You should start thinking Get all your paperwork By now you should have This will allow you to see
about what life will be like together and start looking a reasonable idea of what clearly what your options
when you’ve retired. at what options are your options are. Make are and how much you
Consider topping up your available to you. You may sure you ask for a number could get, both today and
pension and preparing want to ask your pension of different annuity in future years. Decide
for retirement (see page 22). provider for a valuation – scenarios, such as With- which options best meet
but bear in mind that this Profits, Fixed Income, your needs, then call
is likely to change by the Rising Income, Joint and Prudential to discuss your
time you actually retire. Single Life policies. choices and ask for a quote.
20

21. 10
MAKING YOUR DECISION
KEY STEPS TO TAKING YOUR PENSION INCOME continued
If your needs change or you change your mind, All being well, though, and with help from Prudential
there may still be time to back out. Normally the or advice from your Financial Adviser, you’ll have
cancellation period is 30 days from the quote being the confidence to start enjoying your pension income
issued, but some companies (at their discretion and right on cue.
depending on how far on your application has progressed)
may allow you to cancel right up to the last minute.
4-8 WEEKS 2-3 WEEKS IN THE FINAL
BEFORE BEFORE RUN UP
You may also want to speak If you’re moving pensions Armed with all the It normally takes several
to a Financial Adviser. from different sources, information you need, weeks between applying
Narrow down your options you need to apply 4-8 you’re now in the position for your chosen quote and
to a shortlist. weeks in advance of your to make your final decision. your pension being
actual retirement date. converted into pension
Ask Prudential if you need income. So make sure you
help in understanding have access to funds to
anything so you can make cover any possible gap
your final decisions. in income.
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 21

22. 11 IT COULD PAY TO TOP UP YOUR PENSION
MAKING YOUR DECISION
WISH YOU’D PAID MORE INTO YOUR PENSION?
If you can afford to top up your pension before you take
your pension income, this may be to your advantage.
Paying in extra money is not only tax-efficient,
but it can help boost your pension income.
Most pension companies will accept additional lump
sums or contribution increases so it is well worth
investigating. But before doing anything, make sure
the pension income you would receive outweighs any
charges you may have to pay to top up.
VE
ACHIE
NT TO
“I DO N’T WA G H MY
THROU
TALITY CHIEV
E
IMMOR T TO A
, I WAN G H
WORK THROU
TALITY
IMMOR YING”
NOT D
9 35)
Allen (1
Woody
22

23. MAKING YOUR DECISION
THE TABLE BELOW SHOWS HOW PAYING INTO A PENSION HAS TAX BENEFITS*
Your contribution
The annual allowance restricts your contributions to
For a contribution of £1,000 £5,000 all pension schemes to £225,000 (tax year 07/08),
and if your net contributions exceed this, there will
be a tax charge. You must pay 40% tax on any
contributions over this Annual Allowance.
Tax benefits
When you pay money into your pension,
The taxman adds £282 £1,411 HM Revenue & Customs invests an additional
28.2% on your behalf.
If you’re a higher rate Higher rate tax payers can apply for up to an
taxpayer, you can also up to up to additional 18% tax relief when they fill in their
£180 £1,154
claim back self-assessment return.
The Government has introduced an Annual Allowance. The above is based on our understanding, as at June
This applies to the value of your total pension 2007, of current taxation, legislation and HM Revenue
contributions each year to all pension plans. The & Customs practice, all of which are liable to change
allowance is £215,000 for 2006/07 (increasing for at without notice. The impact of taxation (and any tax
least the following 4 years). If the total of your pension relief) depends on individual circumstances.
contributions is in excess of this Annual Allowance
you will receive a special tax charge, called the Annual *This applies to personal and stakeholder pension only
Allowance charge, of 40% on the excess amount. and not to occupational schemes.
PRUDENTIAL ANNUITIES 0845 073 4000 www.pru.co.uk/annuities 23

24. NOTES Should you need to make some notes – when you talk to us, for instance
– these pages might be just the place.
24

25. 12 WHAT TO DO NOW
TAKING ACTION
Contact us for help and information about Prudential representatives can only provide
Prudential Annuities. information on Prudential products.
To contact us you can:
call 0845 073 4000*between 9am and 7pm, Monday to Friday and
between 9am and 1pm on Saturdays.
visit us 24 hours a day at www.pru.co.uk/annuities
Existing Prudential customers can:
email us via PruMail – our secure email system – if you wish to contact us about
an existing policy. Log on to Pru.co.uk for more information.
*Calls may be monitored or recorded for quality and security purposes.
25

26. INDEX OF KEY TERMS
AND FINALLY
Cancellation period See page 21 Personal pension See page 6
Company pension See page 13 Pension fund See pages 3, 6, 10
Conventional annuity See page 15, 16, 17 Pension income See pages 6, 9, 10, 12, 13, 14, 15,
18, 20-21, 22
Converting into pension income See page 21
Pension sharing (Pension splitting) See page 19
Defined Benefit or
Final Salary Pension Scheme See page 6 Pension valuations See pages 18, 20
Defined Contribution Scheme See page 6 Retail Price Index See page 15
Drawing your pension See page 2 Retirement See pages 3, (7), 8, 12, (13), 14, (18),
19, (20), 21
Earmarked for division See page 19
Retirement age See pages 3, 6
Employee-benefits See page 12
Retirement fund See page 6
Fixed (level) income See page 15, 20
Retirement income See pages 8,17
Joint life See page 20
Rising income See page 20
26

27. AND FINALLY
INDEX OF KEY TERMS continued
Single life See page 20
“YOU C
Stakeholder pension See page 23 AN’T H
OLDER ELP GE
, BUT Y TTING
State pension See pages 9, 13, 18 OU DO
HAVE N’T
TO GET
Ge OLD”
Tax-free cash lump sum See pages 10,13 orge Bu
rns (189
6-1996)
Topping up your pension See pages 22-23
Unit-Linked annuity See page 17
With-Profits annuity See page 6, 16
PRUDENTIAL ANNUITIES 0845 0734 000 www.pru.co.uk/annuities 27

28. www.pru.co.uk
"Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also used
by other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions,
savings and investment products. Registered Office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Authorised and
regulated by the Financial Services Authority.