Annuities
Annuities are used to provide a pension income, in the case of pensions this income is guaranteed for life. The pension lump sum is exchanged for a pension income. Once the annuity has been bought, the income is fixed, the contract cannot be reversed - the pension lump sum becomes the permanent property of the annuity provider.
The level of income that you will receive from an annuity depends upon several main factors:
- The value of your pension fund at retirement
- Age of 'annuitant'
- Health
- Sex
- The prevailing annuity rates at the point of annuity purchase
In general, with all else been equal, the older an annuitant the higher the income which can be secured. Furthermore males usually receive a higher income than females due to generally having a shorter life expectancy.
How they work
Annuities, in the main, are supplied by Life Assurance Companies. The underlying 'annuity fund' is usually invested in fixed interest investments, such as long term government gilts in order to maintain the guaranteed income and ensure regular income payments are made to annuitants.
Annuities can be set up to provide different benefits / options:
- Spouses pension (to protect a spouse, by providing an income, following the death of the annuitant)
- Guaranteed payment periods; 5 years is typical but 10 year guarantees are possible
- Escalation of benefits; income can be protected from inflation - RPI linked escalation, alternatively a fixed % annual increase in income can be secured at outset eg 5%.
- Annuity income can be linked to investment perfornance for example by a 'With Profit Annuity' or 'Unit Linked Annuity'
Further details can be found under the following headings: