You can choose to include a partner or spouse who can receive an income after your death – this is known as a joint life annuity. The amount of income that your partner receives will be determined when you commence the annuity, it could range between 25%-100% of the annuity that is payable to you.
Without a guarantee income will stop on death, if you’re single this may not be important to you. Howveer, if you are married or have a dependant then a guarantee period would ensure the income was paid for minimum period irrespective of when you die.
A guarantee could run for 5 or 10 years. Assming you had a 5 year guarnatee and dies after 2 years then the income would continue to be paif for a further 3 years. If you died after 5 years then the guarnatee would have ended and no further income would be payable. Guarantees are reletively cheap and worth considering.
Level or Increasing (by a fixed amount or in line with inflation)
A level paying pension simply pays the same amount every month, it never goes up or down. The problem with level pensions is that inflation gradually reduces the purchasing power of the income, so in real terms it is worth less each year.
To overcome the effects of inflation it is possible to purchase an income that rises each year. It could rise by a fixed amount (e.g. 3% or 5%), if inflation is higher than the level of increase then value would still fall in real terms but not as much as a level pension. It is possible to link increase to an index like Retail Prices Index (RPI) in which case the income will keep pace with inflation as a measure of RPI.
The problem with increasing annuities is that they start at a lower rate than level annuities. Many people want the higher income of a level annuity while they are younger and believe that as they get older and slow down they will not have need for as much income and can therefore suffer the effects of inflation, particularly if they have another source of income that is inflation protected.
The first thing to consider is whether or not the annuity is paid in advance or arrears. If it is paid in advance then the first payment occurs at the start of the period; in the case of annually paid annuities this is significant because to have an annual annuity paid in arrears would mean waiting 365 days after the annuity starts before the first payment is made.
Lets assume you have chosen an annuity payable annually in arrears… what if you die half way through the year? You would receive no payment, that’s bad news!
If you choose to have proportion included in your annuity then you would receive 6 months income if you lived 6 months or 9 months income if you live 9 months of the year in which you die – in other words you receive a payment equal to the proportion of the year that you have lived without an annuity payment.
Proportion can be included for monthly payments, in this case you would receive a proportion payment equal to the number of days that you were alive in the month.
This is available to people with joint life annuities that have purchased a guarantee. Lets assume that you buy a joint life annuity with a 5 year guarantee reducing by 50% on your death. Your income is £1,000 pa and your spouse’s income will be £500 pa after your death.
Without overlap… your annuity payment will cease immediately and the lower payment applicable to your spouse will commence. Even if you die before the 5 year guarantee has been discharged.
With overlap… if you die within the guarantee period (assume at the 2 year point leaving 3 years of the guarantee) then your annuity will continue to be paid for a further 3 years at the full rate alongside your spouses annuity at the 50% rate. After 3 years when the guarantee is exhausted your annuity payment ends and your spouse continues to receive their own annuity.