An annuity is a way of turning your defined contribution pension pot into a retirement income for life. You exchange your pension savings for a steady income.
If you opt for a single annuity, this income will last for the rest of your life until you pass away. If you choose a joint annuity, it will last for the rest of your life plus the life of the other named person (usually your spouse) on the annuity.
You don’t need to spend all of your pension savings on an annuity. You can opt to use some of it to buy an annuity to secure yourself a regular income and under the pension freedoms you can draw the remaining funds from your pension from age 55.
You can buy an annuity whenever you like — you don’t have to do it on the exact date you retire.
In this guide we discuss single vs joint life annuities and which one might be a better option for your retirement. If you’re keen for loved ones to inherit your pension after you’re gone, we also discuss ways you can pass down your pension to your family after death other than a joint annuity.
The difference between a single and a joint annuity is that a single life annuity is based only on one life, whereas a joint life annuity is based on two lives.
Both single and joint annuities provide a pension income for your retirement, but they work differently depending on which one you choose.
With a single life annuity, your pension lasts until you pass away and then stops whereas a joint life annuity will continue paying out to a named individual after your death. This is typically a spouse but also potentially to a dependent child (under the age of 23).
So the main difference between single and joint life annuities is that a single life annuity ends on the death of the recipient, or annuitant, whereas a joint life annuity continues to be paid out to a designated person after the annuitant’s death.
For this reason, joint annuities are often known as spouse’s annuities, widow’s annuities or survivor’s annuities because there’s an ongoing income to a surviving dependent after the main annuitant dies.
A single annuity is probably the simplest because it’s based on just the life on one person. When that person passes away, the income from the annuity ends.
There is a way for a single annuity to continue paying after death: opt for a guarantee period. A single life annuity with a guarantee period could offer some security for a spouse or loved one after the death of the annuitant. However, if you survive past the guarantee period then your survivor wouldn’t get anything at all from a single annuity.
A single life annuity is likely better if you don’t have a partner or your partner has sufficient pension provisions of their own and won’t rely on your income.
A joint annuity covers both you and another person, typically a spouse. If the annuitant dies first, the second person named in the contract starts to receive income from the annuity until they pass away.
While this is typically used for dependent spouses — those who have little in the way of pension savings of their own — it may also be used for children up to the age of 23. However, this is subject to the conditions laid out by your pension provider and not every annuity will be available on a child’s life.
It’s important to note that if you opt for a joint annuity, your income will usually be smaller. This is to compensate for the fact that the annuity company expects you to be receiving an income for longer.
Typically, the income from a joint annuity is reduced after the annuitant’s death. The survivor’s pension is cut to a percentage of the full amount, e.g. 50%.
It’s possible to allow them to continue receiving the full pension. However, the higher you set the percentage for the spouse’s pension, the lower your initial annuity pension income will be.
Senior Paraplanner at Drewberry
A joint annuity may be preferable where your partner doesn’t have much or any in the way of pension savings. It’s also one potential way to ensure your loved ones can continue to benefit from your pension after your death.
How an annuity is taxed on your death on your age. If you die before the age of 75, your loved ones can inherit annuity income tax-free. If you die after the age of 75, your loved ones will pay income tax on the annuity at their highest marginal rate.
If you have a single life annuity, your annuity usually dies with you. However, you have a couple of options open to you for securing an ongoing payment after you pass away:
As mentioned, an annuity with guarantee period will continue paying out for a set period after your death, providing you die between the start of the annuity payments and the end of the guarantee period.
There’s technically no limit on the length of a guarantee period, but in reality most providers cap it at 30 years and typically they’re no longer than 5 or 10 years. The longer your guarantee period, the lower your initial income will be.
If you had a ten year guarantee period and died after five years, your annuity pension would continue being paid for another five years. If, however, you die after the guarantee period ends there’s no continuation of income.
With a value protected annuity, there’s the potential for you to get back ‘unused’ capital from your annuity after your death, at the cost of a lower annuity income while you’re alive.
With value protection — also known as a capital protected annuity — if you die and haven’t received your entire pension pot in income then it’s possible for your beneficiaries to receive a lump sum equivalent to the ‘unspent’ funds left in your annuity.
If you have a joint annuity, then your annuity income automatically starts getting paid as a survivor’s pension to your designated individual. This is typically expressed as a percentage of your total pension, e.g. 50%, although can be up to 100% if you wish.
You can also get a guarantee period on joint annuities, whereby the full pension is paid out for the remainder of the guaranteed period followed by a potentially reduced joint pension thereafter when the guarantee period ends.
If you arrange a joint annuity with guarantee period, you may want to consider an annuity overlap, which can boost the survivor’s income significantly for the remainder of the guarantee period.
This allows both the guaranteed pension and the joint survivor’s pension to be paid simultaneously for the remainder of the guarantee period. Usually, the survivor’s pension is paid after the guarantee period ends.
Say you have a £6,000 annuity with a 50% joint widow’s pension plus a five year guarantee period. Sadly, you pass away after receiving your annuity for only three years. In this case, your spouse would receive both the £6,000 guaranteed annuity plus the spouse’s £3,000 pension for two years. After those two years, they’d only receive the £3,000 survivor’s pension.
Yes, you can inherit a pension. To inherit an annuity, you would usually set up a joint annuity or a guarantee period. However, an annuity with a guarantee period or a joint annuity isn’t the only way to pass a pension on to the next generation.
If you opt for pension drawdown instead of an annuity — assuming this is appropriate for you — then you’re far more free when it comes to passing down pension cash. Here you keep your pension as a pot of cash and draw down income and lump sums from it as required to fund your retirement.
If you die before the age of 75, your loved ones can withdraw the entire pension pot as one lump sum, take an income from it or buy an annuity. Whichever they choose will be tax free. They don’t even have to be 55, the age at which most people get access to defined contribution pension schemes.
The ‘catch’ is that the inherited drawdown fund will only be free from tax if your beneficiaries take the fund within two years of the death. After two years, all payments are subject to income tax at the beneficiaries’ highest marginal rate.
If you die after the age of 75, there’s tax to pay on an inherited drawdown pension arrangement. While the same options are open to your beneficiaries as if you were to die before the age of 75, HMRC taxes each option at the recipient’s highest marginal rate.
In neither case would you need to pay inheritance tax on an inherited pension as they’re held outside of your estate for inheritance tax purposes.
As you can see, it’s far more flexible to inherit a drawdown pension pot than an annuity.
That’s why many clients who list their top concern as being able to leave their pension pots to their children or other relatives are turning to income drawdown, which better accommodates this.
Head of Financial Planning at Drewberry
Whether you’re looking to buy a single or joint annuity, it’s important to compare annuity rates from across the market to make sure you’re getting the best deal.
That’s why we’ve built an annuity calculator. It takes into account your age, location and whether you want a single or joint annuity to determine the best possible annuity rate for you from the UK’s leading providers.
Thanks to the pension freedoms, you don’t actually have to buy an annuity at all. Previously, you were forced to purchase one at age 75 under the old legislation. Now, this has all changed.
An annuity has many benefits, including that you don’t have to worry about investment risk. With an annuity, your pension income is guaranteed no matter how the markets perform.
However, if you die soon after purchasing an annuity you’re unlikely to have lived long enough to receive back in income everything you paid in.
This said, it’s a possibility that you’ll live long enough after purchasing an annuity so that you’ll receive more in income from the annuity provider than you gave them initially with your pension pot.
You need to weigh up the balance between longevity risk and reward when buying an annuity.
If you or your partner has a health condition, it’s very important you come to speak to an adviser.
You may be eligible for an enhanced annuity due to poor health which means your pension income may be higher as the likelihood is that you’ll be receiving the income for less time.
Senior Paraplanner at Drewberry
It can be a tough decision to make, but to help you decide between a single or a joint annuity consider:
For expert help and advice when it comes to annuities and retirement income, please don’t hesitate to get in touch.
Pop us a call on 02084327333 or email firstname.lastname@example.org.
Director at Drewberry
I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.