Annuities

With a single life annuity you receive an income until you die. When you die the payments stop, unless you have opted for a ‘guarantee period’.

You can chose to increase your income each year at a set percentage or in line with the Retail Price Index (RPI). You might for example, agree a set rate or arrange an increase over time to keep up with the increasing cost of goods and services known as inflation. It also means the income you get at the beginning will be lower than it might be if you choose an annuity with a fixed rate.

Your retirement income changes in line with value of the investments it's linked to. For example, income from a with-profits annuity is linked to the performance of your provider’s with-profit fund. Income in a unit-linked annuity is based on the performance of funds you’ve chosen to invest in.

It’s important to remember with investment-linked annuities that performance can do down as well as up. There’s always the potential to benefit from growth, but there's also a risk that your income could fall.

You can chose to have any income paid just to you or a loved one after you die. The amount they would get would depend on how much you would like them to benefit.

A joint life annuity is normally paid to your spouse or partner but it can also be made to a dependent child until the age of 23. If the child is a dependent due to physical or mental impairment, payments can continue after that age.

If your annuity mentions proportionate payments, that means you’ll receive smaller payments at the start or end of the annuity payment period. For example, if your annuity is going to be paid every 30 days but there are only 20 days between when your annuity began and the first payment date, you’ll receive a smaller amount. In the same way the final payment will reflect the number of days between a regular payment and the date of the policyholder’s death.

A guarantee period is exactly what it sounds like – a guarantee that your income will be paid over a set amount of time, even if you die before the time period ends. Usually set to last five or ten years, they can last up to 30 years. Please bear in mind that there is a cost involved. Not only will the annuity be more expensive, but a long guarantee period also means a lower amount of income.

If you have an annuity that goes to a partner or dependant after your death, you can still have a guarantee period. That will either be:

With overlap – this means that if you die during the guarantee period, regular payments will continue and your partner or dependants’ annuity payments will start at the next planned payment date. So the two payments will overlap.

Without overlap – this means if you die during the guarantee period, the full income payments will continue but your partner or dependents’ annuity payments won’t start until the guarantee period ends.

This means how often your annuity is paid. It’s most often monthly but you can receive quarterly, half-yearly or yearly payments. In some cases the payment frequency might be limited by the amount you get. For example, a payment of £120 a year might be allowed but a payment of £10 per month might not.

This means when you’ll get your first annuity income payment. If your income is paid in advance, you’ll get your first payment as soon as you’ve set it up. If it’s in arrears, you’ll get your first payment after your chosen time period that could be monthly, half-yearly or yearly. Annuities paid in arrears offer a slightly higher income than those paid in advance.

If an annuity is ‘with proportion’ part of the next planned income will be paid when you die. In other words, if you die 15 days after an income payment the annuity will pay out another 15 days’ worth of income.

Annuities ‘without proportion’ don’t make that final payment. They’ll offer a slightly higher income based on the fact that there’s no proportionate payment to make on death.

Value protection (this also called capital protection or with return) is a way of making sure your beneficiaries get the full value of your annuity. If the total income before tax is taken that’s paid to you by the time you die is less than the amount you paid for the annuity, your beneficiary or estate will get the difference in a lump sum payment.

In other words, if you pay £50,000 for an annuity and you’ve received £45,000 in total payments by the time you die, the remaining £5,000 goes to your estate. An annuity with return gives a smaller income than one without return, because it has to guarantee that the original purchase price is repaid.

Certificates of entitlement are a way for annuity providers to prevent overpayment of annuity income after death. They’re sent to annuity holders, who then complete and return them to confirm they are still alive and entitled to the annuity income. Some providers might ask that you have your signature witnessed by a professional person.