A conventional annuity, often called a ‘lifetime’ or ’standard’ annuity is in the UK, the most common pension annuity product. These types of annuity are popular because you will know from day one of the scheme just how much income you will receive each year (before deductions) for the rest of your life. This security allows annuitants to plan their lives and living standards accordingly.
Main Advantages
- Predictability of a fixed monthly income
- Security in the knowledge that you will always have an income and not ‘outlive’ you pension savings.
- Can take a cash-free lump sum (up to 25%) at the start of the scheme
- Incremental increases can be agreed, but with a lower initial income. (guaranteed increases / escalation)
Main Disadvantages
- Cannot mitigate for changing circumstances, such as steep rises in inflation or personal changes.
- Cannot be changed or adjusted to take advantage of future investment return opportunities.
- Death benefits will mean a lower starting income which cannot be changed once chosen.
Death Benefits
- A husbands/ wife / dependents pension up to 100% of the pension you had received
- If you die within 10 years of taking out the annuity, the payments you would have received are paid to your estate.
- Value Protection – if you die before age 75 the starting pension fund value (minus the gross income payments already received) can be paid out, subject to a flat rate of tax of 35%.
Although conventional annuities are appealing given the stability and security they offer, in reality your income in real terms will be going down each year if you opt for level payments. Any rises in prices such as food, petrol or energy could eat away at your income. Also if rates improve after you take you annuity out, you will have missed out on a higher annual income.
If you factor in escalation or guaranteed increases, you will be able to vary your income increase from 0.1% – 8%. This could help offset inflation but if inflation is very high, even the increases may not be enough to increase your income in ‘real terms’.
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