Don't short-change your loved ones by choosing the wrong annuity
Some pension options could leave spouses in trouble
Sunday 10 October 2010
More than half of adults in their forties risk losing their entire pension upon death and leaving their loved one stranded, according to new research from insurer Prudential.
In addition, the study found that 39 per cent of couples have nothing in place to ensure that their income will continue be paid if one partner dies, and a further 13 per cent simply have no idea what will happen to their pension and other investments if their partner dies. In many cases, this is simply down to a lack of understanding about the various options available.
"People might never discuss their annuity plans with their partner and are at risk of losing income, the classic example being that with annuity rates historically low, many people are opting for single life annuities which offer a higher initial income but can lead to difficulties later on," says Vince Smith-Hughes, head of pensions development at Prudential.
This is a particular problem for women because men tend to have larger pensions and are statistically likely to die first. With more men taking out a single life annuity without being fully aware of the consequences, this could leave many women in dire financial straits on the death of their husband. More often than not, investors stick with a standard annuity because they are attracted by the elevated income from the outset. With joint life annuities the payout is reduced because the provider is more likely to make payments for longer. Others simply haven't looked beyond what is offered by their pension provider.
"People often go for the easiest option but this is not necessarily the best," says David Abbis from analysts Defaqto. "There are a lot of options with joint life annuities; you can have a sum guaranteed to pay for at least five years and choose what percentage is paid to your spouse on death."
If you do opt for a joint life annuity, you can typically choose whether the proportion that continues to be paid to your surviving spouse is 100 per cent, two-thirds or 50 per cent of the original pension value. If you choose a guarantee as well, your spouse will continue to receive your annuity income when you die for the rest of the guaranteed term (five or 10 years), then receive their own pension from then until the rest of their life. Also, if you're concerned about decreasing spending power, you can opt for an inflation-linked annuity.
You may prefer to look into income drawdown instead of an annuity. Heavy taxes currently compel most investors to buy an annuity at the age of 75, but these are set to change so that people are able to continue in drawdown as an alternative. With this you keep your pension invested and take an income directly from the fund when you need to, up to a maximum limit each year. This does carry the significant risk that the fund value will fall, but it will also allow you to benefit from increases and bypass poor annuity rates. If you die, your surviving spouse can then take over 100 per cent of the fund.
As well as missing out on the potential benefits of a joint life annuity, retirees also risk losing extra income if they fail to take out an impaired or enhanced annuity. These annuities provide an above-average monthly income if you have an illness or health condition that is considered likely to shorten your life. If you smoke, for example, or have a serious weight problem, you may be eligible for an enhanced annuity – in fact, there are more than 1,500 conditions that count towards an enhancement.
Only about one in 10 of the annuities bought each year are enhanced, but research from annuity specialist Just Retirement indicates that 56 per cent of people aged between 65 and 74 have a long-standing illness and could qualify for an enhanced rate. The potential increase is impressive; for example, a 65-year old male with a £60,000 pot could increase his annuity rate from £3,824 to £4,500 if he had diabetes for three to five years and was treated with medications. "Providers take different views on what might qualify, so it's worth your time to see if an enhancement is available. For just filling in a form you could increase your income for the rest of your days," says Mr Smith-Hughes.
Another mistake people make is to buy their annuity from their pension provider without looking for a better deal – known as taking the open market option. Also, if you have a larger pension pot you may be willing to take on more risk in the hope for a bigger income. A fixed-term annuity pays a guaranteed income for a set number of years, at which point you take out another policy. If annuity rates have increased or your health changes, you could get a bigger income, but you will get less if rates have fallen. Investment-linked annuities are another option and keeps your pension invested in the stock market, but again, this could rise as well as fall.
Beyond pensions, other ways to ensure your loved ones are catered for is to take out separate life insurance. "They could arrange separate life cover or use other savings such as ISAs that would be passed to the surviving spouse and generate an income," says Adrian Lowcock of IFA Bestinvest.
Adrian Lowcock, Bestinvest
"Before retirement, make sure you have death benefit nominations in place so if something happens the surviving spouse gets the pension pot. Post-retirement or when drawing benefits, if you're buying an annuity and it is the only source of income or capital available, then it is usually worth buying a spouse's pension and or a guaranteed period."
Q&A: What’s the best way to invest for our baby?
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
After the election: What will Britain's financial future look like on 8 May?
Simon Read: 'Seven Families campaign offers an escape from financial and emotional distress'
General Election 2015: How you vote next week could affect your finances
- 5 How the language you speak changes your view of the world
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: SNP and its activists 'openly racist' towards the English, Farage says
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
Schools forced to act as 'miniature welfare states' with teachers buying underwear and even haircuts for poor pupils
iJobs Money & Business
£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...
£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...
£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...
£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...
Day In a Page
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park