Optional Benefits

Choosing the most appropriate annuity is difficult enough in itself but then there are the additional issues concerning the benefit options that also need to be considered. The main options available are detailed below and you can pick and choose as many of these as you like.  You must remember, however, that any additional benefit chosen will normally result in a reduction in the starting income of your annuity.

Single Life Annuity: An income for you only.

This type of annuity will pay out the agreed income for the period of your life only.  The income payments will cease on your death with no further payments made to your next of kin.  Receiving benefits on a single life basis will provide you with a higher starting income than that of a joint life annuity.

Joint Life Annuity: An income for you that continues to your spouse or partner.

This type of annuity will allow payments to be made to your spouse or partner if you were to die before them. The income paid to them will be for the remainder of their life and the amount to be paid to your spouse or partner will need to be determined at outset. You could choose to continue the pension in full, this is known as 100% spouse benefit, alternatively, you could choose a reduced pension of say 50%.  The higher the spouse benefit, the lower the initial starting income.

If you are married you should strongly consider choosing a joint life annuity as if you do not then the annuity income will cease on your death, leaving your spouse or partner with no income.  If your spouse or partner already has sufficient retirement income in their own right, then this may not be so much of a factor.

Level Annuity: An income that does not increase.

The income agreed at outset will continue to be paid and will not increase in value over time.  Although this will provide you with a higher initial income, the real value of your income will be eroded over time by the effects of inflation.

Escalating Annuity: An income that increases each year at a pre-determined rate

Although by choosing an escalating annuity the initial income will be reduced, you will have the comfort of knowing that each year the income you will receive will be increasing.  The annual income will increase in accordance with the agreed escalation rate, such as 3%, 5% or Retail Price Index (Inflation). If you are concerned about the effects of inflation on your income, or have a history of longevity in your family then consideration of an escalating income may be of use.

Guarantee Period: Payment for a guaranteed time no matter what happens.

Annuities are guaranteed to be paid for at least the whole of your life.  In addition to this you can opt for a guarantee of either 5 or 10 years.  This means that even if you were to die during the guarantee period, the income will continue to be paid to your estate until the guarantee period has expired.

Adding a guarantee period on the annuity will reduce the initial starting income and is often less important if a joint life annuity has been chosen.

Value Protection: A lump sum if you die before age 75

If you were to unfortunately die before your 75th birthday then the total gross income you have received is deducted from the original annuity purchase price and the balance can be paid as a lump sum on the member's death. This can only be paid if death occurs before age 75 and any payment will be paid less a 35% tax charge.

The decision as to whether or not to include this protection must be made at the outset and although allowed by legislation, this option is not yet widely available from annuity providers.

Payment Frequency:

The annuity income can be paid monthly, quarterly, half-yearly or annually.  In addition it can be paid in advance or in arrears.  In advance means you receive the income immediately and will result in a reduction in the starting income levels.  In arrears means you will wait for payment to be made and usually results in an increase in payment levels.

Summary

Whatever you decide to do, selecting any of the above options will have an impact on the income levels paid.  To see what impact these would have for you please request your free Pre Retirement Report Pack.