Choosing the right option for an annuity

Understand the different key factors that constitute a good choice of an annuity.

08:28 22 January 2014

Most people would think that the right choice would be the highest paying annuity, but it is important to select one that meets your personal requirements in terms of time, interests and cost effectiveness.

It is essential to be aware of the key differences between different annuity options. Do not pick one with a high income to begin with.  It may not serve you well over the long term it might.

Joint Annuities

In order to look after your spouse and financial dependents, a percentage of your annuity would be paid to your civil partner or surviving spouse in the event of your death. Usually this is a fraction of the original sum you receive. If they will not be relying on your pension income, a single life annuity seems to be the right choice for you.

Increasing Annuities

To guard against inflation you can index your annuity to grow either by a fixed percentage every year or in some proportion to changes in a Price Index. This helps ensure your income from annuity is shielded not only from the effect of inflation but also the expected rise in living costs over time. Although you will receive a low sum as monthly income in the beginning, it will go up sooner or later.

Payment Guarantees

In addition to joint annuities you can also select a value protection or payment guarantee to take care of your dependent spouse or children after you die. Payment guarantees is a way to ensure that your annuity carries on disbursing income for a predetermined period. Value protection makes sure you receive payments equal to or greater than the amount of the fund pension used to purchase your annuity.

Payment frequencies

The common choice is to receive monthly payments in advance of the month but you could opt for quarterly, half-yearly or annually and even in arrears. It is up to you to select the best option for your circumstances.