What is an Annuity?
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 that lasts until you pass away.
You don’t need to spend all of your pension savings on an annuity. You can opt to use some of it to secure yourself with a regular income and access your pension from the age of 55 under the pension freedoms with any remaining funds.
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.
What’s the Difference Between Single and Joint Annuities?
As mentioned, 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.
Single Life Annuity
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.
Joint Life Annuity
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.
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 a potential way to ensure your loved ones can continue to benefit from your pension after your death.
Buying Annuities: Comparing Annuity Rates
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 the Drewberry Annuities Quote Engine. 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 some of the UK’s leading providers.
You can get annuity rates from the UK’s leading providers in just two minutes to help you with your retirement income decision.
Should I Buy an Annuity?
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.
Pensions & Investments Expert at Drewberry
Very happy with the advice I received from Jake Beale at Drewberry on my income protection. All sorted in two short easy phone calls.
What Happens to My Annuity Pension When I Die?
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.
Single Annuities When You Pass Away
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:
- An annuity with guarantee period
- A value protected annuity.
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 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, as 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.
Joint Life Annuities and Death
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.
Can You Inherit a 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 you 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 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.
Wealth & Pensions Administrator at Drewberry
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Expert Pension Advice on Single & Joint Annuities
It can be a tough decision to make, but to help you decide between a single or a joint annuity consider:
- Does your partner need a pension income after your death because they don’t have one of their own? If so, a joint annuity may be your best option.
- Does your partner have their own pension income? If so, a single annuity may be sufficient.
- Can you sacrifice income today for an income for your partner later on? Joint annuities typically pay less than single annuities because the annuity company assumes they’ll be paying for longer.
- Do you want to pass down your pension? Consider a joint annuity or even forgoing annuities entirely and opting for income drawdown.
- What’s your annuity rate? Use our annuity calculator to work out how much income you’ll receive from an annuity, then use our Pension Drawdown Calculator to see if that can be matched or even bettered with income drawdown. It might be that an annuity isn’t the best option at all.
For expert help and advice when it comes to annuities and retirement income, please don’t hesitate to get in touch. You’ve saved long and hard for retirement and so it makes no sense to make a snap decision that could potentially harm your retirement income.
Use our Annuity Quote Tool or simply pop us a call – you can reach us on 02084327333.
Pensions & Investments Expert at Drewberry