If you are nearing retirement and have decided to opt for the tried and tested route of buying an annuity which will give you a fixed income until your death, then you will have a vital decision to make.
Should you opt for a single life annuity which provides you with a potentially higher income for the rest of your life? Or opt for a joint life annuity which gives you a lower income while you are alive, but continues to pay it to your spouse/partner or children after your death?
As with all decisions about retirement, your choice of annuity is a very crucial one that can have a significant impact on the way you live life in the years to come.
The best way to come to a conclusion is to seek independent financial advice. The other way is to get as much information as possible about the pros and cons of each type of annuity which will help you make an informed decision.
Single Life Annuity
A single life annuity has the advantage of giving the annuitant a higher rate of income. This income will be provided either for a fixed time period (Guaranteed Time) or until the death of the annuitant.
It is ideal for retirees who do not have a dependent spouse or child. In simple terms, if you are single or your spouse/partner has made adequate pension arrangement, then a single life annuity will be the right choice for you.
Upside: Higher income as compared to a joint life annuity for the rest of your lifetime
Flipside: The payment will cease at your death. Your spouse/partner or children will not receive any financial support after your death.
Tips while buying: If you have decided to opt for a single life annuity, then you should shop around to find the best rates and features.
Joint Life Annuity
If you have a spouse/partner who is dependent on you for financial support and you wish to provide them with some sort of financial stability in the event of your death, then a joint life annuity may be the right choice.
A joint life annuity will provide a monthly income to your dependent nominees after your death. You can opt for a fixed income level spread out over the entire duration of the annuity, or you can reduce it by a percentage after your death.
Typically, the lesser you choose to be paid out after your death; the more you receive while you are alive. So, if your dependent partner has another source of income or has managed to save some funds for her twilight years, then it is better if you opt for a higher income while you are alive.
Upside: Your financially dependent spouse/partner or children will receive a monthly payment after your death
Flipside: Your monthly income will be lower than a single life annuity. Also, some providers may impose certain restrictions. For example, they may not accept your partner as a nominee if they are younger than you by ten years or more. In other cases, you have to be married or in a civil partnership to be able to nominate your partner as a dependent. If you are choosing your children, then the income will only be paid until they reach a certain age (usually 23)
Tips: Shop around until you find the best rates even when you split your income. If you have opted for a guarantee period, then ask your annuity provider for an overlap service. If you opt to choose an overlap, then your dependent partner can maximise the payments in the event of your early death.
Remember that buying an annuity is not the only option you have now. Pensioners now have more flexibility and choices in the way they access their pension pot.
Alternatively, you can also access Pension Wise’s free government-backed service to get impartial financial guidance.