As I’m sure you’re aware, a lifetime annuity buys you a retirement income for life. You exchange your pot of retirement savings for a regular stream of income until you pass away.
It’s one of the most secure ways to provide retirement income because it’s guaranteed and there’s no investment risk. This means you continue to get your pension no matter how the underlying investments perform.
With an annuity with a guarantee period, your loved ones continue to receive income from your annuity if you die within a set period.
So if you had a 5 year guarantee period and died 3 years into receiving your annuity, your beneficiaries will continue to receive your income for another 2 years, until your guarantee period is over.
Annuity guarantee periods are usually 5 or 10 years, but there’s technically no limit on the length of a guarantee period. (Note that most providers place their own ceiling on guarantee periods, typically a maximum of 30 years.)
A guarantee period will continue paying your income for a short period after you die. However, if you die after the guarantee period, or with only a short time left, your beneficiaries won’t get much or any continuing income.
If you want your loved ones to inherit your pension, another option is a joint annuity. This will continue paying a spouse or partner after your death up until their death. Again, though, your annuity pension dies with your partner instead of you.
A better way to pass your pension down to your children may be pension drawdown. This involves you shifting your pension pot to a drawdown fund and withdrawing lump sums and income payments from it as required.
Drawdown funds can be passed down to your loved ones free from inheritance tax and, if you pass away before the age of 75, there’s usually no income tax for them to pay on the pension they’ve inherited, either.
Of course, the risk with pension drawdown is that although you benefit from greater flexibility, your fund might run out too soon. To help address this issue, we’ve put together a Pension Drawdown Calculator. This illustrates how long your drawdown pot might last.
It may well be a sensible choice to opt for a retirement annuity over drawdown, especially if your pension pot is small or you’re not comfortable with making investment decisions. However, pension drawdown can offer greater flexibility, freedom and the chance for your pension to continue growing in retirement.
It’s not an easy decision to make, which is why we’d always recommend speaking with a financial adviser. Even if you opt for an annuity, it pays to have a chat to see if we can shop around on your behalf to get you the best deal. Whatever your pension needs, the team at Drewberry is available to help on 02084327334.
Neil AdamsWealth & Investments Expert at Drewberry