Important: The information on our website is not personal advice but we can offer advice if specifically requested. What you do with your pension is an important decision, which could be irreversible. Make sure you understand your options and check they are suitable for your circumstances: take appropriate advice or guidance if you are unsure. The Government's free Pension Wise service can help. It provides impartial guidance face-to-face, online or by phone - more on Pension Wise.
When you set up your annuity it's fixed for life, so it's vital you choose your options carefully and ensure you get the best rate you can for your chosen option. You should consider both your immediate and long-term income needs when making your decisions as well as those of any spouse or partner. Make sure you declare all health and lifestyle factors for both of you as you could get more income.
Below we have listed the four main decisions you need to make when setting up your annuity. You can mix and match to suit your needs and requirements. If you want some variable income too you can also try out a combination of an annuity and drawdown via our Retirement Planner. If you can't find the option you're looking for please call our Helpdesk on 0117 980 9940.
Buying your annuity - choose wisely. Don't forget that once you've chosen your annuity provider and set up your annuity under current rules you cannot change it for the rest of your life.
Brian is an IT manager and has been married to Susan for 35 years. They have 3 children and 6 grandchildren.
Brian and Susan have both done their sums and have worked out how much they need to live on. This is based on what they currently spend on living expenses, running the house etc. and taking into consideration how much they plan to spend on travel and other hobbies now they are retired.
Brian wants to make sure that if he dies first Susan will have enough to live on. Brian's other pensions pay a widow's pension and are linked to inflation so he is keen to consider an annuity that continues to support Susan. They have worked out Susan would need about half of Brian's pension.
"Brian and Susan have done their homework and worked out their retirement budget; this is a really good idea. A joint life annuity comes to mind for them. A 50% spouse's pension will mean Susan will receive a pension of half the amount Brian has been receiving when he dies.
A level pension suits Brian and Susan since they have other income which is index-linked to help protect against inflation. A level pension provides them with a higher income now than they would receive if they had a pension which increases. This will help them enjoy the early years of their retirement, but the buying power of this level pension will reduce over time.
If Brian and Susan decide the pension should stay the same after Brian's death they should take 100% spouse's pension. Providing a 100% spouse's pension means a lower pension income than if you provide a 50% spouse's pension."
John is single and works in accounts. His children are both grown up and are financially independent. John wants to make the most out of the income from his pension scheme now because he will also be getting an income from his other pension arrangements which will be index-linked (that is, the amount he receives will increase over time).
"After taking tax-free cash, a level annuity would be my initial thought for John. This would work well but only because he has other index-linked pensions. If he did not have these other index-linked pensions I would not be suggesting a level pension. The level pension will pay the highest amount of immediate income.
John does not need death benefits from his pension and wants to maximise income now, so an annuity in only his name without a guarantee period does just that. It does mean that on John's death no payment will be made to his family.
If John did want to make sure some benefit is paid if he were to die early, he could consider adding a five year guarantee period. A five year guarantee period need not reduce your starting pension by very much.
This guarantee means if you die in the first five years, your income will continue to be paid up until the end of the fifth year. This means your estate will receive some benefit if you die early. You can also normally choose a 10 year guarantee if you wish."
Mary works in human resources and is married to Peter. Mary is looking forward to retirement and spending more time on her favourite hobby, music.
Peter has a number of pension plans so Mary does not think Peter will need any payment from her pension arrangement if she dies first. However, she is worried about the rising cost of food, heating and day-to-day living, and that her pension won't keep up with inflation.
"An escalating pension appears, at first sight, to be best for Mary. Mary's husband Peter has his own pension to live on so Mary does not need to provide any pension or guarantee if she dies first. Inflation is perhaps the biggest threat to your retirement income as it reduces the spending power of your pension.
Mary should link her pension income to the Retail Prices Index (RPI) so it keeps track with inflation. This means her initial income is lower, but it offers some protection for future buying power."
Rob has been working for his employer for many years and has been paying into the company pension all this time. This will form his and Maria's main income in retirement. Maria has a smaller teacher's pension and they will also both receive a State Pension.
He wants to make sure Maria is going to be ok if he dies first. However, he is also worried about running out of money later in life, and if things become a little tight in 10 years' time, he might be too old to do anything about it.
"In my view Rob and Maria should consider a joint life, escalating pension. This is the 'Rolls Royce' of pension annuities because it provides both Maria with a pension if Rob dies first and it increases each year to protect against the effects of inflation.
A 50% spouse's pension would mean Maria will continue to be paid half of Rob's pension on his death. Rob's pension will move in line with the Retail Prices Index (RPI) every year, meaning the buying and spending power of his pension should be protected. This is important to Rob as he is worried that, without an increasing pension, the effects of rising prices will bite later in retirement."