If you are in poor health or have an unhealthy lifestyle, you might qualify for an "enhanced annuity".
A single life annuity pays the highest income but stops on your death. If you are married consider the joint life option because if you die first your pension will continue to your spouse at the percentage selected
Most annuities are guaranteed for 5 years, but 10 years is often used instead of a joint life annuity
It is natural to want the highest income initially, but it is important to consider a rising income to protect your income from the effects of inflation
Open Market Option
When you have chosen the appropriate annuity options you are ready to shop around for the best annuity on the market. This is called "Exercising the Open Market Option".
It is possible to increase your annuity by up to 25% by buying your annuity from the top company.
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Other Options
With Profit Annuities and Flexible Annuities
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Pension Drawdown and Phased Retirement
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Lifetime annuities with income flexibility, choice of death benefits and investment control. |
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Defer your annuity until age
75 but start drawing income. Flexibility and better death benefits. |
Single or Joint Life
Annuity based on one life or two
A single life annuity pays the most income, but stops when you die.
If you are married it is usual to have a joint life annuity which continues
to your partner if you die first. You can choose how much income your partner
will receive after you have died. For example a 50% joint life annuity means
that when you die your partner will recede 50% of your pension until they
die.
Comparing options
£ 100,000 purchase, male aged 65, female aged 65, level payments.
For male joint life, male 65 female 60, for female joint life, female 65 male 70
Income can be paid for a minimum period of time
Most annuities are guaranteed to be paid for a certain period. This means that if you die soon after purchasing an annuity your family will still receive some income.
If you bought an annuity without a guarantee period, and died the day after, your income would stop, your partner would get nothing or a reduced amount it was a joint life annuity and the insurance company would make a huge profit.
To protect against this unlikely event you can guarantee that your annuity
will be paid for at least a minimum period. If you select a 5 year guarantee
(this is the norm) and died after 2 years, your family would continue receiving
an income for the next 3 years. If you had chosen a 10 year guarantee, the
payments would continue for another 8 years.
Comparing the options
£ 100,000 purchase, male aged 65, female aged 65, level payments.
The technicalities of guarantee periods
Most annuities have a guaranteed period of 5 years, which means that if the annuitant dies after say 2 years, the balance of the guarantee period, that is 3 years will be paid as continued income payments.
The balance of the guarantee period is always paid in the form of continued income to your nominated benificiary, normally your spouse.
Where there is a spouse's pension and a guarantee, the spouse's pension may start immediately after the death of the 1st annuitant, or at the end of the guarantee period. The former is called with overlap and the later is called without overlap.
The balance of any guarantee period is tax-free as it is paid under the terms of a discretionary trust.
Under the proposed new simplification rules, the maximum guarantee period for annuities will remain at 10 years but the benefit must be paid as income because there is no lump sum option (even the guarantee period is 5 years).
Annuity payments can be level or increasing
A level annuity pays the highest income at the start and does not increase in the future. Whereas an escalating annuity starts at a lower level but increases each year. The increases can be constant, e.g. 3% each year or the increases can be linked to changes in the Retail Price Index, more commonly known as index linking.
Comparing the options
It is only natural to want the highest income but you shouldn't forget the effects of inflation. An increasing annuity may start lower but it will pay out more income in the future. Remember "Inflation is like sin, every Government denounces it, but they all practice it".
£ 100,000 purchase, male aged 65, female aged 65, guaranteed 5 years.
How long does it take for a level annuity to catch up with escalation?
The chart below compares the future payments from a level annuity compared to an annuity increasing at 3% compound per annum and an RPI annuity. Future inflation is assumed to be 4% per annum.
£ 100,000 purchase, male aged 65, guaranteed 5 years.