What’s Best: An Individual or Joint Annuity?

One of the key concerns for a married person when buying an annuity is whether to invest in an individual (single life) annuity or a joint life annuity. At first glance, the choice is obvious: surely a joint life annuity that gives your spouse an income should you die is the best option. But it’s not quite that easy.

Factors that affect your selection

Firstly, a joint-life annuity might not be an option. Many life companies won’t entertain such a request if your spouse is more than ten years younger than you, for example, because it increases the likelihood of having to pay income for an extended period.

Then there are the income payments that would be made. A single life lifetime annuity will be paid through to your death. A joint life lifetime policy will be paid through to the death of the last surviving partner. Again, this increases the possibility of an extended payment period for the life company. This will decrease the amount of regular income paid to you from the outset. Any decrease will affect your lifestyle in retirement.

If your partner has his or her own pension arrangements, then it may be that you don’t require a joint life annuity at all. Or perhaps you need one that doesn’t pay the same amount of income as before your death, but rather a reduced amount. Typically standard rates of income payment to a spouse after death will be either 100%, two-thirds, or 50% of the retiree’s income before death. The higher the annuity payment after your death, the less the initial income will be.

Joint life annuities are not reserved for people who are married or in a civil partnership. They can also be used by those retirees who have a person dependent upon them, most commonly a child. A joint annuity will give the dependent person the income needed until an age when they are financially independent. This age will be set at the time the annuity is purchased.

An overriding factor in the selection of either a single life or joint life annuity is the level of income that will be paid. If the income is too low through the purchase of a joint life annuity, then the annuitant will have to find other ways of ensuring his or her spouse is cared for financially in later life. For this reason, many annuitants will consider various life insurance policies which will pay out a lump sum which can be used to replace income for the spouse.

Questions to ask yourself

When making the choice between single life and joint life annuities, there are various questions that you should ask yourself to help you make the right selection. The first and most obvious of these is do you need a joint annuity? If your spouse has adequate pension arrangements, or perhaps is likely to come into a large inheritance, then the answer may well be no. In such circumstances you will be able to benefit from the larger income that a single life annuity will pay.

You also need to consider not just your age, but that of your spouse, too. If your spouse is far older than you, then a single life annuity with a guaranteed term of, say, 10 years, may be sufficient. Such an annuity will pay a higher income than a joint annuity, and guarantee income payments to your spouse for a period from the time of your death to the end of the guaranteed period should you die. This option is a lot cheaper than a joint life annuity.

Taking the larger income that a single life annuity offers may be the only viable option for your lifestyle and regular expenses. However, it may be possible to source separate life insurance that can be paid for from annuity income and the proceeds be used to create an income for your spouse on your death.

Summary

Whether to select a single or joint life annuity is not a straightforward decision. You will need to seek the advice of a good financial advisor before making this important decision. For married people, or those with a dependent person, then the financial advisor should review all pension arrangements before making any recommendations.

Once decided upon either a single life or joint life annuity, then a search of the market can be conducted to find the best rates available for your needs. Don’t forget other factors that you may need to consider, such as the effect of inflation upon your income, if you want to have your annuity based upon an investment fund (with the associated risks/ rewards), and the medical conditions of both you and your spouse. All of these concerns will affect the income you receive from your annuity.

Remember:

• A single life annuity will give a larger income than a joint life annuity
• A joint life annuity will protect your spouse should you die first
• Joint life annuities can be purchased to pay varying income amounts upon your death
• The higher the income for your spouse after your death, the lower the initial income will be
• It is important to review all pension arrangements of both partners to make the best decision
• A guaranteed period may be more appropriate than a joint life annuity
• Consider the cost of life insurance to replace lost income upon your death