As well as different types of annuities, many also come with a number of options available - so you can tailor them to your exact needs. It's important to understand what these options are so that you'll know how much income you'll receive, what you can protect, and who'll receive any protected sums after you die.
How can I find out about my options?
One way you might find out about your annuity options is from what's known as a 'wake up pack'. Wake up packs are information packs sent out by pension providers to elicit a response from customers before they retire, and to remind them of the options open to them.
What options will I have when I buy an annuity?
Once you’ve chosen which type of annuity you’ll be buying – a standard annuity, an enhanced annuity or an investment linked annuity – there are some decisions to make that will help personalise the product for you and make sure it’s right for your situation.
Before I do that, is there anything I need to think about?
You can take all of your pension savings as a lump sum, but you will be subject to any relevant income tax if you take any more than 25%, and any money you do take out will obviously reduce the amount available to buy an annuity. The lower the capital sum you have, the lower your regular income will be.
OK, so which options should I think about when buying an annuity?
There are five main factors you'll need to decide on.
1. How you'd like to receive the income.
2. Whether or not you'd like to protect the money you use to buy your annuity against early death.
3. Do you want to protect your annuity payments for a set period of time?
4. Do you want to protect against the effects of inflation?
5. When would you like to receive your income?
Dependant or joint annuity
If you would like to ensure that your annuity carries on paying your spouse or a dependant after you are gone, there are options available. It will usually mean that you will need to accept a slightly lower amount of income from the start – but obviously the income will continue to be paid to your spouse or dependant after you are gone and can be as much as 100% of your original annuity income. It's therefore worth asking yourself these questions:
- Does my spouse/partner have a pension?
- Will my spouse/partner have an annuity of their own?
- Will their income be enough for them to manage financially after I die?
- If my spouse's/partner's health is poor, does it make more sense to have higher income assured now?
- What happens if my spouse/partner dies before I do?
Perhaps most importantly at this point, it's worth mentioning that you should think about talking through these options with your spouse, partner or dependant. If you are in a long-term relationship then the financial decisions you make now could affect both of you for the rest of your lives. When we refer to spouse or partner, this means someone you are married to or in a civil partnership with. A dependant is someone who can demonstrate financial dependency on you.
It costs relatively little to secure a guarantee period with most annuities: a length of time during which, if you die, your annuity will continue to be paid either to someone else or into your estate.
This option can return a lump sum to your beneficiaries if you die without having received the full value of your pension fund. It is sometimes known as annuity or capital protection and is more commonly offered by enhanced annuity providers. The older and less healthy you are, the more this option will cost.
Protecting against inflation
Over time, the value of your income will reduce. Think about it this way - what you buy today with a £1 coin, will probably cost more to purchase in the future. You can protect your income against those effects by introducing an escalating level of income that's tied to the rate of inflation, but this will reduce the level of your starting income.
Receiving your income
Nearly all annuities allow you to take your income on a monthly, quarterly, half-yearly or yearly basis to suit your needs. What you decide will depend on how you need to budget your income against your expenditure.
Do I have to make these choices straight away?
Yes. You can't change your mind about the type of income you'll be receiving, or how it's structured, after you start receiving it. So think hard about having a regular income and how you'll budget to use your annuity during retirement. Would you like to save money now from that income to use later? What will you use the income to pay for? Does your spouse/partner have their own income, and what will happen when you die? Between you, will you want to manage your finances so that you think about making payments monthly, weekly, regularly?
Where can I get more information?
You could also contact Pension Wise – a free and impartial government service that helps you understand your new pension options.
Alternatively, HUB Financial Solutions - part of the Just Group - offers an annuity comparison service that could help you make sense of your options.