A pension annuity does contain a wide range of options that includes indexation, spouse’s benefits, and guarantees of the annuity income being paid for a fixed period of time from vesting, typically 5-10 years, regardless of whether the annuitant actually lives or dies. Each added option will cost a bit more and consequently will result in a decrease in the initial income compared to a level standard pension annuity.
A guaranteed annuity provides an income which is guaranteed to be payable for a minimum period of time regardless of when the annuitant dies. For example, an annuity guaranteed for 10 years will pay an income for a minimum of 10 years from the date the annuity is bought, even if the annuitant dies during the period. If the annuitant survives beyond the 10 year guarantee date, the income will continue to be paid throughout their lifetime.
If the guarantee period is 5 years or less and the pension annuity originates from an occupational pension scheme, the outstanding guaranteed annuity will be paid out as a lump sum. If the guarantee period is for more than 5 years, an income instead of a lump sum will be paid. Now, if the contract includes provision for a spouse, then on the death of the first life, the annuity income will continue (although not always for the full amount) to the second life until their death.
If you are married or perhaps in a civil partnership, you might want to select a joint life annuity where any payments would continue to be paid to the surviving partner for the rest of their lives. You can chose to have these payments arranged so that they continue at the same level as when the annuitant was alive, or you can select to have them reduced, by a third or a half.
Annuities which increase in line with the Retail Prices Index (RPI), or at a fixed percentage amount each year, say 3% or 5%, can be selected from the outset. If you want to maximise your initial income, though, selecting a level annuity will pay out more, but you will be at risk of having your spending power eroded by inflation. With people living longer these days, the effects of inflation can be pretty considerable, even within the current low inflationary economic cycle.
Naturally, annuity rates do vary depending on the options selected and your individual circumstances. The more options you select the lower the rate and the lower the retirement income. Selecting no options for an individual of good health will produce the best starting income. However, selecting no options is only a part of the equation if you have ill health,as this does greatly impact on the level of income you can expect.
