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.
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:
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.
Key questions to ask yourself when you’re considering if a joint pension is right for you include:
Your current annuity rate, or the cost of your annuity, will be based on a number of factors, including:
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.
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.
For help and advice on joint annuities and pension drawdown, don’t hesitate to get in touch.
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Director at Drewberry
Needed to transfer my pension from one company to another and thanks to Sam it went through very smoothly. Would highly recommend.