There are different types of annuity with a number of different options that determine how much income you will receive and how often.
Health and lifestyle
You may be able to benefit from an enhanced or impaired life annuity which pays a higher income if your lifestyle or your health could reduce your life expectancy. Even if you think you’re healthy, if you’re a smoker, overweight or taking any medication it could boost your retirement income.
You can guarantee your annuity for a specific number of years. This means it will continue to pay the income even if you die before the specified period is up.
Selecting a guarantee period will provide a slightly lower level of income, but it guarantees that your estate continues to receive the income.
Spouse’s pension (Joint Life)
A Joint Life annuity will pay you an income for the rest of your life. It will then go on to pay an income to your spouse, civil partner, or a dependant for the rest of their life after you die.
You can choose how often you want to receive your income: monthly, quarterly, half-yearly or yearly. You can also choose when the money goes into your bank account - at the start (in advance) or the end (in arrears) of each period.
Being paid ‘yearly in arrears’ will give you the highest income, as this gives the provider company more time to invest your funds. ‘Yearly in advance’ will provide the lowest income.
You can decide whether your annuity will pay a fixed income (which will decrease your purchasing power), or one that increases to protect you against inflation.
- A level annuity may provide a very comfortable income today. But in ten or twenty years’ time inflation will reduce its value substantially.
- An escalating annuity which increases with inflation will initially provide a lower income, but its value over the years will give you consistent buying power for life.
- Alternatively, you can select a fixed percentage increase – say for example 3% - which would provide a consistent annual increase year on year regardless of whether inflation is higher or lower.
Value protection is a way of protecting the value of your annuity in case you die earlier than expected. If you take this option a proportion of your original pension will be returned to your beneficiaries as a lump sum, although 55% will be deducted for tax.
Tax Free Cash
When you convert your pension savings to an annuity you have the option to take up to 25% as a tax-free ‘lump sum’. Alternatively you can add this sum to your annuity to provide a bigger income for life – which will be taxed. It’s a decision that needs to be carefully considered. If you choose to opt for the lump sum amount you may also need to consider what to do with it. Our advisers can advise you on both counts.