At retirement, you should be able to take a part of your fund credit benefit in cash and will need to use the balance to buy an annuity (pension) that gives you a monthly income.

There are two main kinds of annuity (pension): a “living annuity” and a “life annuity”.

Living annuity:

• A living annuity is an investment where your retirement benefit is invested to provide you with an income after retirement.
• Each year, you choose how much income you want to take from the investment. The minimum that you can draw down as income from the living annuity part of the annuity is 2.5% of the total investment value each year.
• The annuity provider will apply the maximum drawdowns provided for in legislation and regulation.
• There is no fixed pension increase as the amount you draw as an income is your choice.
• You can’t take the benefit out of the living annuity while you are alive, but any benefit left in the living annuity will pass to your nominated beneficiaries when you pass away.

Life annuity:

• The life annuity will pay you an income for as long as you live.
• You can choose for your pension income to be paid for a guaranteed period. Should you die prematurely, the pension will continue to be paid to your spouse or beneficiaries for the remainder of the guaranteed period.
• You can also choose that the pension income be paid to your spouse for their lifetime if you pass away.
• Your increases can be linked to inflation, be a fixed percentage or be linked to the investment returns of the portfolio you are invested in. The amount that you will get as a starting monthly pension income will differ depending on the option you choose. When you buy the annuity from the annuity provider, you will decide how your future pension increases will be calculated.
• Although this type of annuity pays as long as you are alive, there is an option to include a guarantee period after your death, where for example the pension would be continue to be paid for a period after your death, or continue to be paid to a spouse for example.

The key difference between the two types of annuities is where the risk lies. In a living annuity, you can easily run out of money if you draw too much income too soon. If your income level is not sustainable or if you live longer than expected, you can deplete your capital while you still need an income. Your income needs to be carefully managed in relation to the returns being earned. A life annuity will pay you an income for life that never decreases, because the insurer takes on the risk of paying you for as long as you live.

Recent research shows that a combination of the two types of annuities may be needed. A registered financial adviser can help you decide on the most suitable approach for your own circumstances.