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Buying a Joint Life Annuity

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What is a Joint Annuity Pension?

When you buy an annuity, you swap all or some of your defined contribution (also known as money purchase) pension for a regular income for the rest of your life. For this reason, most annuities sold on the market today are known as lifetime annuities because they will provide you with a pension income until you pass away.

You can choose when you receive your annuity income: monthly, quarterly, biannually or annually. Pick the option that bests suits you and your ability to budget in retirement.

Remember, when you buy an annuity, if you pass away in the early years of the contract, you’ll likely get less back in income than you paid in. This said, if you live for a long time after buying your annuity, you’ll continue receiving an income regardless of the fact that you may end up taking more in income from the annuity company than you originally paid in from your pension.

How Does a Joint Annuity Work?

While a single annuity covers you for the rest of your life, a joint annuity is typically paid to your husband / wife / civil partner after you pass away for as long as they live. However, they can sometimes be paid to a dependent child, usually until that child is aged around 23, depending on the rules of the annuity provider.

A joint annuity can be a way of ensuring your partner receives a pension after you pass away. It’s particularly useful if they don’t have much in the way of retirement provisions of their own.

As these annuities are based on the life of two people — and typically the second person is a spouse / civil partner — joint annuities are known by a number of different names, including:

  • Survivor’s annuities
  • Widow’s pensions
  • Spouse’s annuities.

Annuity Options

  • Level or escalating
    A level annuity means your income will remain fixed over time, potentially therefore being eroded in real terms by inflation. An escalating annuity will rise each year in line with consumer prices. Escalating annuities typically pay a lower amount initially to make up for the fact it rises with time.
  • Guarantee period
    An annuity with a guarantee period will continue paying out the full annuity for the rest of the guarantee period if you die sooner. So if you had a 10 year guarantee period and died after 5 years, your annuity would continue paying out as a survivor’s pension in full for a further five years.
  • Enhanced annuity
    If you or your partner are ill, you may qualify for an enhanced annuity. These are annuities that will pay you a higher initial income because you’re ill with a compromised life expectancy or you smoke. Enhanced annuities are available for couples even when only one partner has a compromised life expectancy. In this instance your annuity rate might be slightly lower than if you bought a single enhanced annuity, but it would still be above the annuity rate typically offered for a joint annuity underwritten on a healthy couple.

What Happens to an Annuity on Death?

How an annuity is taxed when you die will depend on the age you are at death. If you die before the age of 75, the income for your dependants will typically be free from income tax.

If you die after the age of 75, your loved ones will usually have the annuity taxed as income in the normal way. Inherited annuities, just like other inherited pensions, are generally free from inheritance tax.

It’s possible to have a joint annuity with a guarantee period. If you choose this option, you might want to consider an annuity overlap. This can significantly boost the survivor’s pension for the remainder of the guarantee period.

If the original pensioner dies within the guarantee period, an annuity overlap allows both the joint survivor’s pension and the full annuity to be paid for the remainder of the guarantee period. Without the overlap, the survivor’s pension would only kick in once the guarantee period ended.

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Do I Need a Joint Annuity Pension?

Key questions to ask yourself when you’re considering if a joint pension is right for you include:

  • Would your partner have enough income in their own right after you pass away? If they don’t have an income of their own, a joint annuity could be a good option.
  • Does your partner have their own pension? If so, a single annuity just in your name might be fine.
  • Can you afford to get a reduced income today to ensure your partner receives an income later on? Given that the annuity company assumes it will be paying an income for longer, joint annuities typically have a lower starting income than a single annuity, depending on your circumstances.
  • Do you want your loved ones to inherit your pension? A joint annuity can pass down your pension to loved ones, although if you want them to inherit your pension pot’s capital you might consider pension drawdown over an annuity.

How Much Does a Joint Annuity Cost?

Your current annuity rate, or the cost of your annuity, will be based on a number of factors, including:

  • Your age
    The older you are when you buy an annuity the more you’ll receive each year, as the likelihood is you’ll be receiving your income for less time
  • Your life expectancy
    The longer you’re expected to live from the start date of your first annuity payment, the less you’ll receive each year
  • Your health/medical history
    If you’re in poor health you’ll receive a higher income with an enhanced / impaired life annuity, as again you’re likely to be receiving annuity income for less time
  • Your smoker status
    Smokers get better annuity rates than non-smokers because of the life-limiting consequences of smoking
  • Your location
    Your postcode has a bearing on annuity rates because there are considerable differences in life expectancy across the country.

If you choose a joint annuity, you’ll likely get a lower initial income than if you chose a single annuity. This is because the annuity company anticipates that, with a joint annuity, it will be paying the annuity income for longer.

Need Help? Get Expert Annuity Advice

If leaving a pension to your loved ones is your main reason for opting for a joint annuity, consider whether income drawdown might provide you with a better option.

With drawdown, you can leave any unspent lump sum in your pension pot to your loved ones free from inheritance tax. They can use that to buy an annuity later if they wish, but also have the freedom of flexibly accessing the pension by continuing drawdown.

Tom Conner Director at Drewberry

For help and advice on joint annuities and pension drawdown, don’t hesitate to get in touch.

Pop us a call on 02084327333 or email help@drewberry.co.uk.

Tom Conner
Director at Drewberry

Extremely satisfied with the help and advice from Drew, since the beginning him understood what I was looking for and have the patience to help me out with all my questions and doubts. Didn’t tried to be push or annoying calling me all the time like so many did before. At the end we find the perfect medical policy for me and my daughter that covers everything that we need. I more than recommend them and if in the future I need something else for sure I will contact them again. Giving only 5 stars because I can’t give 6!!!!

Natasha Caversan Mucci
07/06/2019
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