Annuity Options
If you choose to buy an annuity to provide you with your retirement income, there are several options available to you, enabling you to tailor your annuity to your particular requirements.
Your pension
Arranging your pension is important. If you’re buying an annuity, you need to choose the right type of annuity. However, your pension requirements might be best suited by an alternative pension product.
Tax-free cash
You are normally allowed to take up to 25% of the value of your pension fund as a tax-free cash lump sum, using the balance to fund your retirement income. The more tax-free cash you take, the less there will be to provide you with an income.
Tax-free cash is also known as Pension Commencement Lump Sum (PCLS).
Annuity income
There are a number of factors that need to be taken into consideration when arranging your annuity income.
Single life annuity
You can select a single life annuity, where the annuity income will be paid throughout your life only. When you die the income stops. You can select a guarantee period for your annuity to provide some protection for your dependants. See the details below.
Joint life annuity
If you’re in a relationship where you and your spouse or civil partner are financially dependent on each other, you should strongly consider going for a joint life annuity which continues to pay an annuity income to your spouse or partner if you die first, allowing them to cope from a financial perspective.
If you select a joint life annuity you can choose up to 100% of the income to continue being paid to your surviving spouse or partner after your death. Typically, incomes of 50% or 66% are selected.
Level or increasing annuity income?
Level income
If you opt for an income that remains level throughout, your income will not increase. Although the income you receive initially may be higher, you should bear in mind the effect inflation will have on your income over time.
Increasing or escalating income
You can opt for an income that moves in line with the retail price index (RPI). This means that your income will keep track with inflation and therefore retain its buying power.
You can take an income that rises by a fixed percentage each year (typically 3% or 5%). This means your income could counter the effects of inflation, if inflation doesn’t rise too sharply.
If you select an increasing income, your initial income will be substantially lower than if you select a level income.
Annuity income on death
Guarantee period
Unless you have opted for a joint life annuity your annuity income will cease upon your death, even if you die shortly after taking the annuity.
With a guarantee period, you can opt for the income to be guaranteed (typically for 5 or 10 years). Should you die within this time the income will continue to be paid for the remaining period.
If you opt for a guaranteed period within a joint life annuity your income will be paid for the remainder of the guaranteed period first, normally in accordance with what’s been set out in your will. At the end of the guarantee period your spouse’s income will be paid at the level you have chosen (if you have chosen one).
Annuity payments
Do you want to receive your annuity payments in advance or in arrears? If in advance, you receive your first payment straightaway. If in arrears, you wait until the end of the chosen payment period. You can also choose for your annuity payments to be paid monthly, quarterly, half yearly or annually.
It’s worth noting that the options you choose will affect the level of income you receive. Our friendly advisers can guide you through your various options and help you make the right decisions.
