Joint Life Annuities: Protecting Your Loved One’s Future

As you grow old with your partner, you tend to share more and more. In addition to possibly sharing a home, you might share a car and a number of financial products. Joint bank accounts and joint mortgages are a prominent notion amongst with many couples. However the financial offerings for loved ones do not stop there. Many people opt for joint life annuities in later life in order to protect their partner in the event that the worst should occur.

Although we all hope that we will be able to look after our loved ones as long as we live, we cannot predict the future. This is why many people decide to take measures within their control in order to provide for their spouses regardless of what the future holds.

What is a joint life annuity?

A joint life annuity works in a similar way to the standard annuity; offering consumers an income throughout their retirement period in exchange for a lump sum which usually stems from a pension fund. Annuities provide a method of financial security which can be sustained for your full retirement period.

The way that a joint life annuity differs is that this type of annuity is paid to both you and your partner and will continue to provide an income to your partner when one of you passes away. This is often known as the ‘last survivor’ annuity as the surviving annuitant will receive payments for the remainder of their existence.

Would they receive the full amount?

This would be a decision made when taking out the annuity. You can opt for your partner to receive the full amount of the annuity but most annuitants choose for annuity payments to be either 1/3, 1/2 or 2/3 of the original income in the event of death.

How much will I receive?

As with all annuity payments, the amount of income that you will receive is calculated based on a number of factors including your age, your health, your sex and your lifestyle. The provider will utilise these and a number of other factors to gauge an estimated life expectancy which your annuity rate will then be based on. With joint annuity packages, the life expectancy of your partner will also be considered by your provider.

Are there any drawbacks?

Because providers will be paying out for the remainder of two lives instead of one, joint life annuities tend to be a more expensive annuity option. This means that income payments you receive are likely to be less than a single life annuity. As providers evaluate the life expectancies of both the annuitant and their partner, issues can occur when one partner is considerably younger or healthier than the other and this could also affect the amount that you receive.

A General Look At Purchased Life Annuity

A purchased life annuity deal refers to an annuity plan that is purchased with funds other than the pension funds of an individual. The money used for this purchase can be funds saved in other investment vehicles like an ISA. It could equally be funds from the savings account of an individual and it can also be the tax free lump sum withdrawn from a pension pot. As soon as tax-free lump sum has been withdrawn, an individual can do whatever they want with the capital.

As soon as the contract has come into play, the terms and conditions of a Purchased Life Annuity contract cannot be altered just as it is with other annuity contracts. Therefore the income agreed stays the same along with any additional options you may have included in the contract. The income you will receive from most annuity providers is determined by certain factors. The first is your age as the rates hinge heavily on your assumed life expectancy. Your state of health and size of your premium amount also affects it a great deal too. If you decide to include any additional benefits to the annuity deal, your monthly income will be adjusted to accommodate any benefits you may have included into the deal.

Since the options you chose and income payable from the annuity are fixed once you have bought the annuity, it is very important for you to explore and understand all the options available before you try to purchase the plan.

Taxation on purchased life annuities

With purchased life annuities, the taxation is favourable and it is in fact one of the main reasons why many people choose to go with it. This is how taxation works with purchased life annuities. Since the annuity is purchased using funds from an individual’s savings, the HMRC considers part of the income paid to the annuitant each month as a return on capital and this part is therefore considered to be tax-free. The only part of the income that is taxed by the HMRC is the one they consider to be interest on capital meaning that less tax is paid on the total income payment.

Generally, the example you will be provided with when applying for purchased life annuities will show you the gross income payable to you as well as how much tax will be reduced for every particular case.

What are the main options you can add to your purchased life annuity deal?
The main options you can add in your purchased life annuity contract include the following:

A spouse or dependants pension: Income will continue to be paid to your spouse or partner even when you have passed on. You have the option of allowing 100%, 67% or 50% of the income to go to your spouse when you pass on. The higher the percentage you choose, the costlier the contract. This doesn’t mean you will be required to come up with more money but rather your monthly income will be much lower than what it should have been.

Guaranteed period: With a guaranteed period, you are ensuring that your income will continue to be paid even if you die within a certain time limit. Generally, the guaranteed period you can choose is 5-10 years maximum. Guaranteed periods are not expensive and they offer the individual additional security for your annuity income.

Escalation: Inflation is one of the biggest concerns of annuitants especially individuals who took out annuity plans very early. This is because no one wants the purchasing power of their retirement income to be eroded by inflation. In other to fight this, providers make it possible for individuals to choose their income to increase by a fixed percentage each year. The highest percentage allowed by many providers is 8%. Alternatively, you can decide to have your annuity income linked to the RPI. Adding the option for escalation is very expensive as it is likely to reduce the initial amount you will be receiving as income during the early periods of the contract. However, it is still very important for you to include this option in your purchased life annuity deal as a young retiree.

Protection of capital: With this option the amount you paid into the annuity plan will be refunded to a named beneficiary minus any amount of money that has already been paid out to you. This is applicable to any age there are no tax deductions since it is considered a return of your capital.