Most of us know that when you buy an Annuity you have to make a few choices. Should the income be paid monthly or yearly? What guarantee period do you include? Do you include a spouse’s pension? How much would you like your spouse get on your death?
These are just some of the decisions you will need to take.
As a rule the more options you add to your Annuity, the lower the starting income will be, but just how much difference does each option make? We thought we would take a look.
Costs v Benefits
The three most popular benefits added to Annuities are escalation, a guarantee period, and a spouse’s pension.
When we looked at the cost of adding these benefits we found the following:
- The cheapest benefit to add to an Annuity is a guarantee period
- Adding a spouse’s pension is the next cheapest option and would reduce your starting income by around 10% per year
- Unsurprisingly, escalation is the most expensive option, with an Annuity increasing by 5% per year having a starting level of just 51.71% of a level Annuity
The figures show that when deciding on the shape of your Annuity cost is an important issue, but is far from the whole story. Your Annuity could be a significant source of income for you, and indeed your spouse, for many years to come. It is therefore vital you take time to focus not only on cost but also on what benefits you or your spouse may need in the future. After all, once you have set up your Annuity you can make no changes to it. 
So, what does each option cost?
The table below shows the current cost of adding in an escalation, a guarantee period or a spouse’s pension to a basic level Annuity. For example if a male aged 65 chose the top paying Annuity provider on a standard single life basis with the income paid annually in arrears with no options they would receive 100% of the Annuity income payable. Whereas if they chose a single life Annuity payable monthly in advance with a five year guarantee period, they would receive 96.31% if the income payable.
As you can see, some options have less of an impact than others.
Male aged 65Percentage of Annuity |
Female aged 65Percentage of Annuity |
|||
|
Annuity Option |
When paid annually in arrears |
When paid monthly in advance |
When paid annually in arrears |
When paid monthly in advance |
|
Standard, level, single basis annuity with no options |
100% |
96.89% |
100% |
97.07% |
Adding escalation options |
||||
|
Escalation linked to RPI (Retail Prices Index) |
62.78% |
60.47% |
60.77% |
58.59% |
|
Escalation at 3% per year |
72.90% |
70.30% |
70.39%
|
67.98% |
|
Escalation at 5% per year
|
57.18% |
54.78% |
53.72% |
51.71% |
Adding guarantee periods |
||||
|
5 year guarantee
|
99.26% |
96.31% |
99.56% |
96.71% |
|
10 year guarantee
|
97.23% |
94.50% |
98.24% |
95.55% |
Adding a spouses pension |
||||
|
Two thirds of the original pension to your spouse |
89.90% (assuming spouse is aged 62) |
87.10% (assuming spouse is aged 62)
|
91.07% (assuming spouse is aged 68) |
90.78% (assuming spouse is aged 68) |
|
Half of the original pension to your spouse
|
92.88% (assuming spouse is aged 62) |
89.89% (assuming spouse is aged 62) |
92.75% (assuming spouse is aged 68) |
91.79% (assuming spouse is aged 68) |
The small print
For the purposes of the table we have used the income that the top paying Annuity provider would give.
The Annuity rates used were those applicable on 17th and 20th June 2011 and source using The Exchange.
The Annuity rates assume no enhancement due to health or lifestyle issues.
The actual Annuity income that an individual receives may be higher or lower than the figures shown in the table and is dependent upon the size of pension fund, personal circumstances, Annuity rates at the time of purchase, and of course the options you choose.
