Annuity Income
Annuity income can normally be taken at any time from age 55. While benefits can be drawn from your fund early, doing this is likely to considerably reduce the level of income you receive.
Annuity payments
Should you die shortly after annuity payments start, an annuity can represent poor value for money, as the fund will have been used to purchase the retirement income and cannot be paid as a death benefit.
However, the annuity contract can be set up to provide annuity payments for your spouse / partner and dependants after your death.
Most people take their tax free cash entitlement – up to 25% – and use the remainder of their pension fund to buy an annuity.
Annuity income payments
You choose at the outset how you want to receive your annuity income payments. Most people choose monthly payments, but you can have your annuity paid quarterly, half-yearly or annually.
Annuity income payments can be made either in advance or arrears. If you opt for a monthly income and purchase your annuity on 1st August and you receive your payment on that day, you are being paid your income in advance. If your first payment is not made until 1st September, then you are being paid in arrears.
Generally people opt for monthly in arrears because the slight increase in annuity income is favoured over the slight increase in speed of annuity payment, which in practice will be less than one month, as the annuity provider must take receipt of your pension fund monies before they can start to make any payments.
Increasing annuity income
As an alternative to an annuity that pays a fixed income throughout, you can choose an increasing annuity income – an annuity that increases in payment each year (an escalating income), such as by 3%, 5%, or in line with the Retail Prices Index (RPI), see inflation proof annuity. Whilst this might help offset the effects of inflation, it does reduce your starting income.
For example, if you opted for the 3% increase your starting income would be around 25-30% lower, and, if you opted for the RPI increase, your starting income would be around 35-40% lower. In both cases you would have a lot of catching up to do, perhaps up to 15 years in the case of a 3% increasing income.
