There are a number of options available when taking out an annuity, the main options are:
Conventional annuity or investment linked annuity - a conventional annuity has no investment element - it provides a known income throughout your lifetime, possibly longer, if you include some of the options below. Alternatively, there are annuities with an investment element, which offer the potential for an income which increases, if investment returns are good. Find out more about investment linked annuities and with profits annuities.
Inflation Proofing or Level Annuities – an inflation proofed or escalating annuity will increase each year either by a fixed amount or by the rate of inflation. An annuity without inflation proofing (a level or fixed annuity) will provide a higher level of initial income but provide no protection against inflation – find out about escalating/inflation proofing annuities.
Joint Life or Single Life – a joint life annuity means building in a pension to continue for your spouse in the event of your death. This can be anything up to 100%. A single life annuity would cease on the death of the person buying the annuity (unless a guarantee period was taken out) - see examples and more details about joint life annuities. If death occurs before age 75, the dependent's income is paid out tax-free, and taxed as income for the recipient if death occurs after age 75 . See annuity death benefits, for more details.
Guarantee Period – this ensures that the annuity is paid for a minimum number of years, normally 5 or 10 years. New rules from April 2015 mean that there will be no maximum, with some providers offering 30 year guarantee periods. How it works; so if you opt for a 10 year guarantee and die after two years, there would be eight more years worth of payments. Very often there is little difference between a five and a ten year guarantee. Click here to read more about guarantee periods. For details of how the income paid in the event of death is paid see annuity death benefits, for more details.
Value Protection – This option permits a return of any unused fund in the event of death. So, it is money paid in (to buy the annuity), minus income paid out - a "money back guarantee". The tax situation is a little more complicated. See annuity death benefits, for more details about how this is taxed.
Payment Frequency – you can opt for an annuity to be paid monthly, quarterly, half-yearly or annually. Once selected, you can not change it at a later date.
Advance/Arrears – you can opt for the income to be paid as soon as the contract starts by taking the payment in advance, or taking it in arrears, which would mean waiting to receive the first payment. Having the payment payable in arrears will mean a slightly higher income.
Whatever options you're considering, it is important to remember to shop around for the best annuity for your circumstances and use your open market option to get the best rate for you. Remember, you don't have to take out an annuity with the same company you have your pension with. Find out more about the open market option or contact us to shop around on your behalf.
If you can't find the information you're looking for on the website, or you want to know more or have a question, or just want to chat through some details about your pension then please feel free to contact us, without obligation. Either contact us online or call 0800 011 2713.