Annuity Payments

Pension, or annuity, income can normally be taken at any time from age 50, but this is moving to age 55 from April, 2010. While benefits can be drawn from your fund early, doing this is likely to considerably reduce the level of income you receive from your pension fund.

Annuity payments are for life

Possibly poor value if you die early

Your annuity is paid for your lifetime. Should you die shortly after payments start, it represents 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 for your spouse / partner and dependants after your death. See joint life annuity for details.

Most people make their annuity purchase after taking their tax-free cash entitlement, which is up to 25% of the total value of the pension fund.

Frequency of annuity income 

How often do you want your income

You choose at the outset how you want to receive your income. Most people choose monthly payments, but you can have your annuity paid quarterly, half-yearly or annually.

Annuity income  

Annuity 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.

Annuities that increase in payment (an escalating income)

As an alternative to an annuity that pays a fixed income throughout, you can choose one 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 the starting incomes.

For example, if you opted for the 3% increase your starting income would be around 25-30% lower than the figures shown above, 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.

Putting this into figures, assume the level annuity quote you have is for £200 per month. Choosing a 3% increasing annuity income could reduce your initial income to £140 per month and choosing the RPI increasing annuity income could reduce your initial income to £120 per month.