Making the
right choice
Making the right choice - things to be aware of
There are many considerations when determining whether an annuity (a guaranteed income for life) is right for you.
This information can also be found in the Pre-retirement report.
Product
A lifetime annuity is set up on a fixed contract basis; you’ll know in advance how much you will receive and how often. Buying a lifetime annuity is a one-off purchase and once completed, your income won’t reduce if annuity rates go down.
You won’t benefit if annuity rates increase in the future. You can’t change the shape of your annuity, and you can’t cash the annuity in once it’s been set up and any cancellation period has expired.
Tax-free lump sum
You can choose to take a tax-free lump sum from your pension, normally of up to 25% of the value of your pension pot (Subject to certain limits).
Doing so will reduce the remaining funds available for purchasing an annuity, and cash held in savings may affect your entitlement to means-tested state benefits.
Protecting against inflation
If you select an escalating annuity, your initial income will be lower than a level annuity, but it will increase each year to keep pace with inflation or a set percentage, helping to protect your purchasing power over time. While a level annuity provides a higher starting income, an escalating annuity's income growth may eventually pay out more over the long term. It can take many years for the total payouts of an escalating annuity to exceed those of a level annuity.
Guarantee period
One feature you can choose when selecting your annuity options is to include a guarantee period. This means, that in the event of your death during the guarantee period, your annuity income will continue to be paid to a chosen beneficiary for the remainder of the guarantee period.
You can choose the length of the guarantee period you want - and this can be up to 30 years from the date of the start of the annuity. Including a guarantee period in your annuity will mean that your annuity income will be lower than if no guarantee period is included.
The guarantee only applies for a fixed limited period. Your annuity income will be lower if you choose to add a guarantee period.
Providing for dependants
Another feature you can add when setting up your annuity is to include a dependant's income. You can choose for part or all of your income to be paid to a named dependant when you die - for example, your spouse, civil partner or someone else, as long as they are at least 40 years old. This will be payable for the rest of their lifetime.
If you choose to include a dependant's pension, it will reduce the amount of guaranteed income for life you receive each year.