For those approaching retirement, the main draw of an annuity is that it provides a guaranteed income for life, regardless of how long you go on to live. In return for your pension fund, you can enjoy the certainty of never outliving your resources; you will go on to receive your guaranteed income whether you live to 90, 100 or more.
However, unless you have certain death benefits in place then,should you pass away, your annuity income dies with you. This can be a distinct disadvantage of an annuity, especially if you die in the early years, as you would not necessarily have had value for money. The funds held by the provider from those who pass away earlier than expected in their retirement are then used to supplement the incomes of those who have ‘outlived’ their fund value.
If you would prefer the comfort of knowing some or all of the remaining pension fund will be passed to your loved ones, or returned to your estate on your death, you have a number of options to enable this to happen:
A Joint Life annuity means the income payments from your pension fund will continue to be paid to your partner, dependents or any beneficiary you wish to nominate should you die before them. Naturally this option means you would receive a smaller income from your fund from the outset than that provided from a single-life annuity, but if you die before age 75 the continuing income to your beneficiaries will be paid tax free.
An annuity Guarantee Period offers you a guaranteed period of time when your annuity income will continue to be paid out, even if you pass away during this time. You decide the period at the outset - the most popular periods are 5 or 10 years as these periods can be very reasonably priced. Remember that if you pass away after your guarantee period has finished then no further payments will be received.
Adding Value Protection (or lump-sum death benefit) to your annuity means that when you pass away, the provider will pay out your original fund less tax-free cash and any income you have taken from it. The money is returned to your nominated beneficiary on your death. Value Protection can be an expensive option though, so must be weighed up carefully.
When you put your funds into Drawdown then you do not have to pre-select any death benefits. As for an annuity, you nominate one or more beneficiaries to receive your remaining fund on your death as either a lump sum or as a regular income. Whilst this is more flexible than an annuity, the main concern for many retirees is that it opens your pension fund up to investment risk, and there is no guarantee your money will provide an income for life like an annuity will do.
Since April 2015, if you die before age 75 and you have a Joint Life annuity, Value Protection or your funds are in Drawdown then your nominated beneficiary can benefit from a lump sum or retirement income entirely tax-free. If you pass away aged 75 or over, then they may still be able to inherit some or all of the remaining fund but will have to pay tax on it at their marginal rate of income tax.
Making your decision
With so many options to choose from and understand, seeking the assistance of a specialist in retirement income is vital. Speak to a Retirement Line specialist about your options today by calling 0800 652 1352 (or local rate mobile number 01733 307 240).
Retirement Line work on a non-advised basis, providing factual information to enable you to make your own informed decision.