Guaranteeing your income for life

True or false?

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"Annuities are always poor value if you die shortly after you buy one"

"Annuities are always poor value if you die shortly after you buy one"

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There was some truth in this, but things have changed. There is now a much wider choice of options you can include with your annuity:

  • Value protection. If you choose 100% value protection, the money you paid to buy the annuity is returned to your estate on your death or paid to a beneficiary, minus any payments made before you died.

  • Guarantee period. This means the annuity will continue to pay an income for a set period from 0 to 30 years. If you choose a 15-year guaranteed period, and die after 5 years, a further 10 years’ income would still be paid. 

You can also arrange for some or all of your income to continue be paid to a spouse, civil partner or someone financially dependent if you die before them.

If you’d like your income in retirement to be guaranteed for life and free of investment risk, a pension annuity could be for you. You exchange some or all of your pension savings for a type of insurance policy that provides a regular lifetime income.

As with any major purchase, it is important to shop around for the best deal. There are also a number of options you can choose to meet your needs. 

Use the annuity comparison service provided by HUB Financial Solutions to do the legwork for you.

Which is better - a guaranteed income for life or drawdown?

There are pros and cons with each option and you can combine them.

A guaranteed lifetime income provides peace of mind. You’re paid an income for life whatever happens to investment markets. For many people this is reassuring. They can get on with enjoying their retirement, not worrying about their investments.

But there are drawbacks. These products lack the flexibility of drawdown. The income can’t be varied nor can you take a one-off payment once the annuity has been set up.

With drawdown, you can take what you want, when you want. You have complete flexibility. Your money remains invested, and you can buy a guaranteed lifetime income at some later point if you want.

But your money is at risk. If you make poor investment decisions, markets perform badly, you take too much income or live longer than you expected, your money could run out.

There are other issues to take into account, but the fundamental question is whether you prefer the flexibility of drawdown or the certainty of a guaranteed income for life? Or you can combine these products. Perhaps the best of both worlds?

Can I protect my income against inflation?

Inflation can reduce the real value of your income over time so it’s worth considering an option that increases your income each year. For example, in 2008 a pint of beer cost £2.30 and a fish supper £2.43!

Most products providing a guaranteed income for life have options to automatically increase your annuity income each year by a set percentage or by linking to a measure of inflation such as the Consumer Price Index.

Bear in mind that adding one of these options will reduce your initial income (though your income will increase in the future).

What happens when I die?

There are different ways to protect your loved ones.

A guaranteed income for life pays you a regular income for the rest of your life. When you die your payments will stop, but you can add options to protect your loved ones after you pass away.

These are the main options you can add:

Dependant's income. Some or all of the income you were receiving continues to be paid to a spouse, civil partner or someone financially dependent on you, if you die before them.

Guarantee period. This means the income payments will continue for a set period from 0 to 30 years. For example: if you choose a 10-year guaranteed period, and die after 5 years, a further 5 years’ income would still be paid.

Value protection. This provides a lump sum to a beneficiary or your estate when you die. The amount paid depends on the percentage you protect and how much income has been paid when you die. If you choose 100% value protection, the purchase price would be returned minus income payments made to the date of your death.

Each option comes at a cost. You can use the annuity comparison service provided by HUB Financial Solutions to see the potential financial impact of each option and weigh up what suits you best.

What tax might be payable on my death?

In some circumstances, there’s no tax payable on benefits paid on death.

If you die before age 75
Income from a guaranteed income for life set up on a joint basis will be paid to your dependant or other nominated beneficiary tax-free for the rest of their life.

If you die within a guarantee period, the remaining income payments will pass tax-free to your dependant beneficiary then stop when the guarantee period ends.

Any lump sum payment due from a guarantee period or value protection will be paid tax-free up to the lump sum and death benefit allowance.

The lump sum and death benefit allowance is £1,073,100 less any tax-free lump sums you took when you were alive and any tax-free death benefit payments made when you die - such as a value protection lump sum. (NB if a tax -free death benefit is paid from a policy that was taken before 6 April 2024, this won’t count towards the allowance). Anything over the £1,073,100 allowance will be taxed at your beneficiary’s normal rate of income tax. If you have protection from the lifetime allowance, this amount may be higher.

If you die aged 75 or over
Income payment from any of the options payable on death are taxable at the marginal tax rate of the person receiving the income or lump sum. The marginal tax rate is the tax rate payable on the last pound of someone’s income.

Tax treatments may be subject to change in the future.

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