When you retire, or continue to work but decide to begin drawing your pension, you have the chance to purchase an annual pension called an annuity.
At retirement you will be entitled to a tax-free lump sum, up to the value of twenty-five percent of your total pension fund, and the remaining seventy-five percent can be used to secure a retirement income. Essentially, you can sell your remaining pension fund, or your total pension fund if you choose not to have a tax-free lump sum, to an insurance company. The insurance company takes your pension fund and offers you an annual pension in exchange. You are effectively buying an annual retirement income using your pension fund as payment; this is known as purchasing an annuity.
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