Once you are in a position to start thinking about your Pension Annuity, you will have several options to consider. You need to examine these very carefully and choose according to your personal needs as your choices will have a direct influence on your level of income when you retire.
If you wish to go online to investigate your options, you will find several Annuity Calculators that will work out for you the different options and how your income will be affected. These are the sort of questions that you will need to have answers ready for:
HOW WILL YOU WANT YOUR PENSION INCOME PAID TO YOU?
This can be paid to you in a variety of different ways. It can be paid in advance or in arrears. Also the number of instalments paid to you over the year can vary. You can have one annual lump sum, a payment every six months; four instalments paid each 3 months or, finally, are paid monthly over 12 instalments.
This is entirely your choice and will depend very much on how you like to budget. Some of us may like the regular income on a monthly basis, much the same as when we used to draw a salary. If you are not totally reliant on this income to live on, then being paid once a year may suit you. Being paid in arrears costs less than being paid in advance.
DO YOU NEED YOUR INCOME FIXED OR DOES IT NEED TO INCREASE EVERY YEAR?
A fixed income is the simple option but if you do need your income to increase, you can do so by having it go up in line with inflation or increase it by a fixed percentage of between 0.1% and 10% each year.
Do take into account that the larger the annual increases you require, the lower your starting level of income will be.
You can now look at optional death benefits that you may wish to add. These are as follows:
1. DO YOU WANT A FINAL PARTIAL INCOME INSTALMENT TO BE PAID AFTER YOU DIE?
This option only applies if you decide to take your income in arrears. A final pension payment can be made between the last instalment and your death. This is referred to as ‘with proportion’. If you do not opt for this final payment, then you will have chosen the ‘without proportion’ option. This is also the cheaper of the two options.
2. DO YOU WISH TO ADD A GUARANTEED MINIMUM PAYMENT PERIOD?
Your Pension Annuity will pay you an income for the rest of your life, but will cease when you die. But it is possible to plan your income payments for a set period between 1 and 20 years from the start date. Even if you die within this period, the payment will continue until the end of the guaranteed period.
3. DO YOU WANT TO PROVIDE AN INCOME FOR YOUR PARTNER IF YOU DIE BEFORE THEM?
Again, this is something to consider. If you go for this option then the larger the percentage of income set aside for them, the more costly this option will be. They will continue to receive this income for the rest of their life and will be taxed on it as if it were income.
4. DO YOU WANT YOUR GUARANTEED PAYMENT PERIOD AND YOUR PARTNER’S PENSION PAYMENTS TO OVERLAP?
One more thing to think about. Even if you die during your Guaranteed Period, if you choose this option, which is referred to as ‘With Overlap’, then your partner’s payment will commence even whilst the remainder of your Guaranteed Payments are being paid.
If you opt for ‘Without Overlap’ then your partner would have to wait until the end of your Guaranteed Payment period before they started to receive their pension payments.
5. IS YOUR DEPENDANT’S PENSION INCOME FOR A NAMED PARTNER?
You can choose whether you want an income paid to your current partner or paid to your partner at the time of your death. Do bear in mind that if you choose the current partner option and you re-marry, your partner at the time of your death (if different) will not be entitled to a dependant’s pension income.
If you don’t have a partner when you buy the annuity, but want to provide benefits to the partner that you have when you die, then you need to name them on your application.