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. Annuity Calculator

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 65

Percentage of Annuity

Female aged 65

Percentage 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.