Guide
Joint life, escalation and guarantees: what each costs
Updated
An annuity is a set of trade-offs sold as a product. Each option lowers the income you start with in exchange for protecting against something. None is right or wrong in general; what matters is which risk you are most exposed to.
Single life or joint life
A joint life annuity continues paying a proportion to a spouse or partner after you die, and it reduces the starting income because it must last two lives rather than one.
The question is what happens to the household if you die first. If the survivor has adequate income of their own, single life may suit; if not, this is the option that stops a bereavement becoming a financial crisis.
Level or index linked
A level annuity pays the same amount forever, so its purchasing power falls every year. An index linked one starts substantially lower and rises.
The crossover point, where the escalating annuity has paid more in total, depends on how long you live and on inflation. Neither is a safe default: a level annuity is a bet on a short retirement or low inflation, and an escalating one is a bet against both.
Guarantee periods and value protection
A guarantee period keeps payments running for a set period even if you die early. Value protection returns some of the original pot on early death. Both reduce the income and both exist to answer the same fear, that you buy an annuity and die shortly afterwards.
A guarantee period is usually the cheaper of the two in income terms. Whether either is worth buying depends on who depends on you and on what else they would inherit.
Everything here is permanent
These choices are fixed at purchase. That is what makes an annuity different from almost every other retail financial product, where a bad decision can be reversed at a cost.
It is also the reason to use the free government-backed guidance and, where the sums matter, regulated advice, before rather than after.