Types of Annuities

Despite the new changes to Pension rules that came into effect in April 2015, most retirees still consider it a better choice to get a fixed income for life, also called an Annuity.

If you have considered your current financial circumstances and have decided that an annuity is the right choice for you, then it is imperative that you buy the correct type of annuity.

Yes, buying an annuity is a task that requires a fair amount of forethought because it is mostly an irreversible decision. Your choice of annuity will also determine the fixed-term income/ monthly income you and possibly, your dependants may receive for the rest of their lifetime.

There are different types of annuities and your choice should depend on your individual financial requirements.

1. Lifetime Annuity: A lifetime annuity provides you with a fixed lifetime income based on your life expectancy and current annuity rates. There are two varieties of Lifetime Annuities.

  • Basic Lifetime Annuity where you can fix your income beforehand. Once again you have the option of choosing between a single life annuity (income only for you) or joint life annuity (if you wish to nominate a beneficiary to receive the income after your death)
  • Investment Linked Annuity is a type of fluctuating income annuity where the income depends on the performance of your investments. There are two different types of Investment Linked Annuities. One is With-Profits Annuity where the income is dependent on the performance of the With-Profits funds of the Annuity Provider. The second is Unit-Linked Annuity where the income will be dependent on the funds that you choose to invest in.

In a lifetime annuity, the annuity rate will be the income that you will receive on every £ that you have accumulated in your pension pot.

2. Enhanced Annuity: An enhanced annuity is normally offered only to people who may have a shorter life expectancy. For this reason, it offers a higher annuity rate which means, a higher retirement income. Some of the criteria for eligibility include:

  • Smokers or a past history of smoking
  • A health condition or disease
  • Obesity
  • A work or employment history in a potentially hazardous environment

The insurance company may ask additional questions before you are considered eligible for an enhanced annuity.

3. Impaired Life Annuity: These are offered to people who suffer from or have suffered from any medical condition which may have reduced their life expectancy. Annuity providers seek complete information on the medical history of the annuitant and additional medical examinations may also be required.

4. Post Code Annuity: A Post Code Annuity offers you a customized annuity rate on the basis of your area of residence. People living in wealthier areas typically receive lower annuity rates as their life expectancy is considered to be higher than that of people living in poorer areas.

5. Temporary Annuity: A temporary annuity pays you an income for a fixed time period or until your death (whichever is earlier). The maximum term period for this type of annuity is five years and hence, it gives you a far higher annuity rate as compared to an equivalent lifetime annuity. You will only need to use a part of your pension pot to purchase a temporary annuity.

6. Investment Linked Annuity: This is a hybrid plan that gives you a partially guaranteed income while the rest of the income is dependent on the performance of your investments. You can select the guaranteed income you need and use a part of your pension pot to buy an annuity which would provide that. The rest of the pot will then be invested and will provide you with additional income on the basis of the returns that these investments generate. If the investments perform well, the additional income will be significant. If the markets are not performing well, then you will only receive the minimum guaranteed income.

7. Purchased Life Annuity: A purchased life annuity, also known as a PLA is a special type of annuity that can be purchased with your income or savings fund that is not part of your pension pot. You may also buy it with the 25% cash lump sum which you may draw from your pension fund. It will provide you with a fixed monthly income but has different tax implications.

8. Fixed and Increasing Life Annuity: A fixed income or a level annuity will pay you a fixed income for the rest of your lifetime. On the other hand, an increasing or escalating annuity will provide you with an ‘inflation-proof’ retirement income. An increasing life annuity has two varieties:

  • Index Linked: Your annual income will be adjusted according to a designated level of inflation which is usually based on the Consumer Price Index or the Retail Prices Index. So, if inflation rises, your income increases too. On the contrary, if inflation reduces as it happened in April 2015, your income may reduce also. But its buying power is retained no matter which way the prices go.
  • Increasing Rate: Your income will increase every year at a set rate which can be selected by you at the start of the annuity term. It can be between 0.8 to 5%. The rule of thumb is that the higher the percentage by which you want the income to increase each year, the lower the starting income will be.

 

The ‘Actual’ Cost Of Dying Without Making A Will

The term ‘intestacy’ is a word that no one ever wants to hear after a loved one has passed away. Intestacy is when a person dies without leaving a will, or an inadequate will is left which doesn’t deal with all the financial and property aspects.

The word ‘estate’ refers to all the property, land and assets of the deceased person. Combine the two terms, and you come up with ‘intestate’, which is basically a synonym for one of the worst legal nightmares you could possibly imagine.

When this occurs, the law dictates how your property and assets will be split up, and between whom. Those entitled to any share will only get it after all your debts have been paid off.

Problems of Not Making A Will

Many families are dysfunctional, even at the best of times. Throw in the death of a family member and things can only get worse, especially if the deceased didn’t have a legal will. The dysfunction will multiply by leaps and bounds. Grudges that have been long dormant or not mentioned in years can rear their ugly heads and come back into the spotlight.

This can cause great stress on the family, often ending in legal actions against one another or the disintegration of the entire family unit. Estate battles usually involve a lot of money, assets, and property. Who should get what, how much, and when, can all be interpreted differently by various family members.

De facto and same-sex relationships make things that much more complicated.

Choosing not to write a will, people are causing pain and hardship to their loved ones beyond the death itself. When family members are unsure if a will was ever made, they would have to spend time and money looking for one.

They would have to spend time searching through papers and documents, go to the bank for financial records, lawyers, accountants, or even public trustees. If no will is found, they may even have to place an ad in the newspaper asking if there are any debtors to be paid.

This would all have to be done at a time when family members are grieving and distressed.

Once they are sure there is no will out there, a family would have to go through the court system to try and gain control, or power over the estate. Due to the time wasted on trying to find out about the deceased person’s estate affairs, family members may have to pay for funeral expenses out of their own pocket.

It is also possible they may have to pay an inheritance tax before they have even received one penny from the estate.

SEE ALSO: How to Claim a Life Insurance Policy

An inheritance tax is the tax paid on your estate after you die.  In simple terms, it is everything that you own at the time of your death, after you have deducted everything owed. Between this tax and the funeral expenses, loved ones may experience significant financial hardship, especially if they are not well off.

They will go into debt, before even receiving any of your estates. Having a well written will avoid all these scenarios. In some cases, banks and other companies have been known to seize the property and assets, to pay mortgages, taxes, and other debts.

Your family will be forced to hire lawyers themselves, to try and get back what is morally and rightfully theirs.

Benefits of Will Writing

Everyone hates going to see lawyers, but having a well-written will could be the best 10 -15 minutes you ever spent. It means that you can clearly and legally decide who inherits what, and how much. Without making a will, the decision will be left up to the government.

Chances are slim to none that the way they decide how your estate is divided will be the same as the way you wished. With a proper will in place, personal belongings, pets, property, etc. will be dealt out according to your specifications. Making a will helps avoid the unnecessary family fighting and bickering, and saves a lot of money at the same time.

They won’t have to pay for lawyers to get probate, or to sue each other after the estate is divided up unfairly.

Dealing with death is hard enough for those left behind. Dying intestate will only make matters that much harder. For the few dollars it costs, will writing will go a long way for everyone’s peace of mind. The ‘actual’ cost of dying will be far less.