Annelida is one of three animal groups possessing segmentation and is central in considerations about the evolution of different character traits. It has even been proposed that the bilaterian ancestor resembled an annelid. However, a robust phylogeny of Annelida, especially with respect to the basal relationships, has been lacking. Our study based on transcriptomic data comprising 68,750 – 170,497 amino acid sites from 305 – 622 proteins resolves annelid relationships, including Chaetopteridae, Amphinomidae, Sipuncula, Oweniidae, Magelonidae in the basal part of the tree. Myzostomida, which have been indicated to belong to the basal radiation as well, are now found deeply nested within Annelida as sister group to Errantia in most analyses. Based on our reconstruction of a robust annelid phylogeny, we show that the basal branching taxa include a huge variety of life-styles such as tube-dwelling and deposit-feeding, endobenthic and burrowing, tubicolous and filter-feeding, as well as errant and carnivorous forms. Ancestral character state reconstruction suggests that the ancestral annelid possessed a pair of either sensory or grooved palps, bicellular eyes, biramous parapodia bearing simple chaeta and lacked nuchal organs. Since the oldest fossil of Annelida is reported for Sipuncula (520 Mya), we infer that the early diversification of annelids took place at least in the Lower Cambrian.