A conventional annuity is a lifetime annuity, in that it pays out an annuity income for life. It is the most common annuity product in the UK, primarily because you will know from day one of the arrangement just how much income you will receive each year for the rest of your life. This security allows retirees to plan their retirement and living standards accordingly. The main advantages are: the predictability of a fixed monthly annuity income; the knowledge that you will always have an income in your retirement and not ‘outlive’ you pension savings; you can take a cash-free lump sum at the start of the scheme; and you can take an increasing income option, though with a lower initial income.
The main disadvantages of a conventional annuity are: you cannot allow for changing circumstances, such as steep rises in inflation or personal issues; it cannot be changed or adjusted to take advantage of potential future investment returns; any death benefits will mean a lower starting income which cannot be altered once chosen. With regards to death benefits, you can select a spouse’s pension up to 100% of the pension you had received, and, if you die within a certain timescale, say 5 or 10 years, of taking out the annuity, the payments you would have received are actaually paid to your estate. We also now have Value Protection, which means, if you die before age 75 the starting pension fund value (minus the gross annuity payments already received) can be paid out, subject to a pretty high flat rate of tax of 35%.
