What is an Annuity?

An annuity also referred to as a lifetime annuity is a financial contract bought from an insurance company in exchange for an individual’s pension fund and is designed to supply an income for retirement.

In exchange for selling their pension to an insurance company the individual will then receive instalments as an annuity from the company which will count as an income for their retirement. The individual may choose how the annuity instalments are paid to them often choosing either monthly or yearly payments but there are many options for them to choose from.

Alternatives to an annutiy

Annuity payments are not the only type of payment that a person can receive in retirement however. When a person reaches the age of 55 they may begin taking benefits from their pension at which point they may receive up to 25% of their pension fund as tax free cash lump sum with the residual fund then being used to purchase an annuity or left in the fund to continue to grow.

Should the client not want to take an annuity but still want to receive an income however, they may take income drawdown which is similar to an annuity in that it provides an income but is different to an annuity in that the pension fund is not sold to insurance company but rather stays in the funds to continue to grow but the individual may take an income from it up to 100% of the GAD limits.

Another provision that many people overestimate the value of in retirement is the Basic State Pension and various additions to this such as the State Second Pension. These can only be taken at age 65 (for men and soon women) and soon age 68 and provide a weekly income which is designed to be taken in addition to any other savings a person has saved up for retirement such as the annuity they will purchase.

How does an Annuity Work?

When you come to the date you wish to retire and perhaps take an annuity it perhaps would be wise for you to contact a financial adviser to seek advice on whether taking an annuity with your recommended provider or perhaps taking an open market option would be the best choice for you.

Once you decide to take an annuity the income you may receive from it will depend on various factors such as your state of health which may provide you with an enhanced annuity, annuity rates, your current age/retirement age, gender and what guarantees you wish to take such as spouse benefit will also be taken into account. All of these will be taken into consideration by the annuity to decide what annuity payment you can receive in retirement.