Small Annuity - Index linked on not index linked.

Cheviot55

If you had to make a choice, which would you choose from the following (1) and (2) and why?

(1) Annuity per year £1,333.44

This lifetime annuity will provide a pension for the rest of your life with an annual increase in line with the Retail Price Index. In addition, on your death, your surviving spouse or registered civil partner will receive 50% of the pension income until their death. This option uses the guaranteed minimum annuity rate.


(2) Annuity per year £1,807.44

This lifetime annuity will provide a fixed pension income for the rest of your life, In addition, on your death, your surviving spouse or registered civil partner will receive 50% of the pension income until their death. This option uses the guaranteed minimum annuity rates.

I do not believe (2) is linked in with the Retail Price Index.

I do not want to take any tax free lump sum payment or move the above into another scheme.

Thank you in advance for any well-meaning and positive answers.

barnstar2077

What is your health like?

Cheviot55

Mid 60s and my health is good as far as I know.

Thrugelmir

Is your spouses pension adequate?

Cheviot55

No I do not think it is adequate at this stage.


My spouse will receive some inheritiance money from the sale of a flat in the coming years which should help.

Cheviot55

It's tricky, my other half receives a small employers pension which pays approx £50.00 per month and currently contributes into a Stakeholder Pension but only has about £30K - £35K in there at the moment.

xylophone

What is the state pension position for you and your wife?

Do you have other pensions? What is the position for spouse benefits if so?

Cheviot55

Neither of us are drawing the State Pension yet.


I have a couple of workplace pensions both of which, following my death, will provide my other half with a small pensions.


After calculating some household budgets I seem to be in a reasonably good position from a pension perspective and I believe my spouse will probably get by with the State Pension including my work place pensions (when I pass on) and the inheritiance from a small flat.

Cheviot55

It is just a case of making a choice between the two annuity options (1) and (2) and whether to take an annuity which is reduced but based upon the RPI or a slightly higher annuity which is not linked to the RPI.

Linton

Twofactors to take into account:

1)Assuming inflation at 2.5% it will take 12 years for the annual inflation linked pension to exceed the fixed rate one. So will you want more money in the first 12 years or subsequently?
2) The index linkage is to RPI which in my experience is well in excess of CPI which better represents actual spending. So going for RPI could mean a pension increasing in real terms, not just matching inflation. If you die first this could be a small but useful extra benefit to your wife.


If you dont really need the money I suggest you go for the RPI linked pension. It isnt a large amount anyway.

davidwatts

Linton wrote: »

Assuming inflation at 2.5% it will take 12 years for the annual inflation linked pension to exceed the fixed rate one. So will you want more money in the first 12 years or subsequently?

But more like 24 years for the cumulative amount you have received from the indexed linked income to catch up with the level one. Not saying that clinches it either way, just it's an additional factor worth considering.

If you were much younger I'd say the index linked option was an easy choice. Perhaps still the safer bet. The missing variable is knowing what the rate of inflation will be for the rest of your lifetime!