Buying an Annuity - Level or increasing- which?

Index linked annuities are very poor value, go with a level ( if you are not eligible for an enhanced/impaired life product ) and save the extra separately if worried about inflation.

ATF101, first thing to consider is that the report of the Pensions Commission noted that for a person of average health the optimal age to purchase an annuity is currently around 75 years old and those younger than that would be better off by being invested via income drawdown and achieving average investment performance.

The small proportion of your income that this sum will be providing suggests that you will not be greatly affected by variations in value during drawdown and that you have the flexibility to seek the potentially higher income available via drawdown.

Drawdown also offers the prospect of an income that may grow with earnings, not just with inflation. You may recall the fuss and campaigns to get the state pension linked to earnings because not doing so causes retired people to have constant income that gradually falls below the general wealth of society. That in turn increases the number in relative poverty - defined as 60% of median income - because the median income rises faster than inflation and the pension.

You do need to consider whether you're comfortable with the variability of investing before choosing drawdown for all or some of the total sum.

Drawdown also gives improved provision for a spouse, since their income from the pension is not halved, as it would be with a typical dual life annuity.

Moving on to the annuity alternative that's the mainstream choice today, it's clear that someone who invests half of the difference in income each year between an escalating annuity and a level annuity and achieves typical investment performance can expect to be better off than if they chose the escalating annuity. This is because annuities are generally producing their income via a link to comparatively low performance government and, increasingly, corporate bonds. Drawdown can instead include a portion of investments that can be expected to grow at a faster rate.

One other consideration for the annuity is whether you need a dual life pension. This pension seems to be destined to provide a relatively small proportion of your income so it may not be required, as the living costs of one person are lower than two. One alternative is to take a single life pension, buy a life assurance policy to provide a lump sum to your spouse on your death and invest some of the difference in income between a single life and dual life annuity.

You should also consider whether your spouse has a pension income in their own name. If they do not have anticipated pension income in their own name that will reach 10,000 a year in today's money there is some tax gain potential by using some of the income to pay into a pension in their name. Upon your death that could be used to buy a single life annuity for them, or could be taken at age 65 when the higher tax allowance starts. Even if they are not earning it's possible to pay in 3600 a year after basic rate tax relief that they get regardless of whether they are actually paying any tax. That combination of tax relief now and no tax on the first 10,000 over age 65 is some extra boost to this approach.

Do also note that this is not an either/or decision. You can freely mix drawdown with one or more types of annuity purchased with part of the pension pot if you think that is your best option.

Lots of possibilities for you to consider in light of your own situation and preferences.