There are many choices to make when you buying your annuity, and different factors to take into account. Below is a more information on the options available with annuities.

Annuity - Options

There are a number of options available when choosing your annuity, but the more options you build in the less the level of income.

Conventional Annuity - This is the most common form of annuity, you hand your money over to the insurance company, and they guarantee you an income for you lifetime or possibly longer if you opt for some of the options available.

Joint Life/Single Life Annuity - When you take out your annuity, you may want it to continue in the event of your death for your spouse or partner, and this is what is called a joint life annuity. If you took it out on a single life basis, then this would provide a greater income than a joint life annuity, but would cease in the event of your death (unless you opted for a guarantee period).

A joint life annuity does not have to continue at the same level as the original starting level, but it could be 100% of the initial annuity, or two thirds or half, or whatever percentage you require. The greater the spouse's pension then the lower the initial level of income. The joint life annuity could turn out to be a worthless benefit, if your spouse were to die before you, or it could ensure that you receive value for money from your annuity, if for example you were to die quite soon after taking it out, but your spouse were to live another 30 years.

Guarantee Period - This is normally either five or ten years. Incorporating a guarantee means that the income will at least be paid out for that period of time once it commences regardless of when your die. If you took out an annuity with a five year guarantee but died after two years, it would pay out for a further three years.

Value Protected Annuities - also known as Capital Protected Annuities were permitted by legislation introduced in April 2006. If you opt for value protection and die before age 75, then the fund used to buy the annuity, minus income payments received will be paid as a lump sum after deducting tax at a rate of 35%.  

Inflation Protection/Indexation - If you include this option it will reduce your initial level of income, but it would ensure that the income increased each year. You can opt for it to increase by a fixed amount each year, or by the rate of inflation. In many cases it can take years for the level of income from an increasing annuity to catch up to a level (non-increasing) annuity. We can work out how long this would be for you, so you can make an informed choice.

Protected Rights/GMP - these are benefits from opting out of the Second State Pension (SERPS), and the benefits you must select are more prescriptive

Impaired Life/Enhanced Annuities - If you have medical problems, or have had medical problems in the past, then you could qualify for a better annuity that someone with no medical problems. How much more will depend on the severity. But even minor conditions can qualify you for a better rate.  Click to find out more

Smoker Annuities - If you're a smoker then some providers are prepared to offer you more income than non-smokers. Click to find out more

Investment Linked Annuities - these offer many of the options of a conventional annuity, but with the addition of an investment linking. This could mean that the level of income actually increases over time if the investment grows well, although you do run the risk that the income could actually reduce if the underlying performance is poor.

To find out how these different options could affect your annuity payment, contact us online or phone us now on 0800 0725987, or request an annuity quote.

Tax Free Cash (also known as Pension Commencement Lump Sum)

Most pensions offer 25% of the fund as a tax-free lump sum. You should seriously consider taking this money even if your main requirement is for income. The reason for this is that the income taken from a pension annuity is all deemed to be income from a tax point of view, and therefore all of it is potentially liable for tax.

Some other contracts can actually offer more tax-free cash than 25%. This would only apply to "occupational pensions" through an employer, and the amount of tax-free cash would depend on your length of service and your earnings.

It is however possible to find that if you have a section 32 contract, which contains Guaranteed Minimum Pension (GMP) that the amount of tax-free cash is less than 25% of the fund value. Although it is possible to change this to enable you to take 25% of the fund as a lump sum, but this could reduce the income available.

Funds under £15,000

If you have pension funds under £15,000, and you're over 60, and you don't have any other pensions, then you can take the entire fund as a lump sum. 25% of it would be tax-free, and the remainder payable as a taxable lump sum. This would only apply if all your pensions (excluding state pensions), either ones you already had in payment, or had not yet taken were the equivalent or less than £15,000.