A conventional, non-invested lifetime annuity is the type that most people buy with their pension funds.
Of all the annuity options available, a conventional, non-invested lifetime annuity is the most simple to understand.
There is no need to review the contract.
You will receive a guaranteed income for life, and you can elect for your spouse/beneficiaries to receive a guaranteed income upon your death.
There are no additional charges applied to the contract once in force. All charges are taken at outset and are reflected in the annuity rate offered.
A tax-free cash lump sum (also called a Pension Commencement Lump Sum) is available at outset.
Disadvantages of a conventional, non-invested annuity
Unless you choose the option of receiving an increasing income (for example: inflation linked or stated annual percentage rise of 3%, 5%, etc.), the income level will not change and cannot be varied in response to changing personal financial circumstances.
You lose control of your pension funds and your pension funds will have no opportunity of future growth.
Any options to provide benefits on death must be selected at outset and may result in a lower initial pension payment. These selected benefits cannot be altered in the future.
Inheritance Tax could be payable on any annuity payments paid to your estate after your death.
Should you die earlier than you expect, it is possible that the total income payments paid to you (and any dependantís payments) will be considerably less than the value of the pension funds used to purchase your annuity.
Level or Escalating Income
A level lifetime annuity pays the same income year after year for the rest of your life.
It has a higher starting income than an escalating annuity but how much you can buy with the income from a level annuity falls as the cost of living generally rises over time.
To protect your income from rising prices, you can choose an escalating lifetime annuity, which pays a lower initial annuity but then increases each year.
There are two main choices:
fixed-rate escalating annuities Ė your annuity income is guaranteed to increase at a fixed rate each year, say, by 3%;
RPI-linked annuities Ė your income is adjusted each year to reflect changes in the Retail Prices Index (RPI), so will rise and fall.
Depending on your age and your chosen annuity options, it could take many years for the income from an escalating annuity to catch up with the income from a level annuity.
Annuity guarantee period
An annuity guarantee period is the minimum number of years that an annuity contract will pay an income (from the start of the contract).
When you buy a lifetime annuity, you can usually choose between from a five year guarantee period, a ten year guarantee period or no guarantee period at all.
Should you opt for no guarantee period, an income will be paid only for the remainder of your life.
When you die, the income will stop completely unless you have requested that a widows/dependantís pension be paid upon your death.
Should you choose a five year guarantee period, an income will be paid for a minimum period of five years or the remainder of your life (whichever is the longer). This means that, should you die within the first five years of your annuity contract, the income will continue to be paid at the full rate until the end of the initial five year period. After that, the income will stop completely unless you have requested that a widows/dependantís pension be paid upon your death.
Should you choose a ten year guarantee period, an income will be paid for a minimum period of ten years or the remainder of your life (whichever is the longer). This means that, should you die within the first ten years of your annuity contract, the income will continue to be paid at the full rate until the end of the initial ten year period. After that, the income will stop completely unless you have requested that a widows/dependantís pension be paid upon your death.
By opting to add a guarantee period to your annuity, you will ensure that you and/or your estate receive a minimum amount from your pension funds.
Annuity providers will charge you for adding a guarantee period to your annuity contract by reducing the income they will pay you.
However, the reduction in income is not usually very high and is it well worth getting several annuity quotes based on the three options of a five year guarantee period, a ten year guarantee period and no guarantee period so that you can make a fully informed decision about what is best for you and your family/estateís beneficiaries.
Single-life and joint-life lifetime annuities
Most lifetime annuities can be arranged on either a single life or joint life basis.
A single life annuity will only pay out during your lifetime (unless the option of a guarantee payment period is chosen).
A joint life annuity continues to pay an income to your spouse/civil partner/dependant after your death.
You can usually choose between a joint-life annuity that pays your spouse/civil partner/dependant the same as you were receiving, or two thirds or a half of what you were receiving.
You can also choose a joint-life annuity that has a level or escalating income.
Joint-life annuities are more expensive than single-life annuities because the annuity provider will expect to continue paying the annuity for longer.
This means they will offer you less income than they would for an annuity on your life only.
Note: If you are not married, check with your annuity provider that your partner will be eligible to receive the income from a joint-life annuity.
What death benefits are available with conventional annuities?
When you arrange your annuity, you must choose whether or not you wish to add death benefits to your contract.
There are two main methods of providing benefits in the event of your death.
The options available are as follows:
A spouseís or dependants pension of up to 100% of the annuity income that you were receiving.
A guarantee period of up to 10 years, which will ensure that on death within the first 10 years, the remaining income payments that you would have received continue to be paid to your estate/beneficiaries.
Annuity protection lump-sum death benefit
Another way of ensuring that, if you die before the age of 75, your money doesnít die with you is an annuity protection lump-sum death benefit.
A lump sum equivalent to the pension fund you used to buy an annuity, minus the income youíve already been paid, will be paid to your estate or beneficiaries.
There will be a tax charge and also, there may be an inheritance tax charge on this payment.
Bear in mind that if you take this option it will reduce the amount of income you will receive because you will be paying for the added protection.
This option is not offered by all annuity providers.
An adviser can tell you whether or not a conventional, non-invested lifetime annuity is the best choice for you.