There are different types of annuity for different requirements and our Guide to Annuities gives a brief overview of this financial product.
Annuities, in their simplest form, are a promise of a regular income for the remainder of your lifetime in exchange for an initial lump sum. Essentially, you are buying yourself an open ended income for a known initial lump sum payment.
Of course, the annuity market is constantly developing and whereas the original annuity was a fixed payment for the remainder of your lifetime, now it is possible to receive an annuity which increases each year in line with inflation (or indeed by a fixed percentage) and annuities which may only be paid for a certain amount of time.
There are now many different types of annuity from which to choose and many companies operating in this very competitive market which makes it important that you compare annuities to ensure that you obtain the most competitive rate. Many types of annuities have been developed for specific purposes and so by their very nature will be most suitable, if not the only option, given certain circumstances.
For the majority of people, their main exposure to annuities will be through their pension scheme, whether this is a personal pension scheme or one provided by their company. Pension annuities, also known as compulsory purchase annuities, will be payable for your lifetime and the amount that you receive will be dependent upon a number of factors, namely:-
- The accumulated fund value
- Your age at retirement
- Your sex
- Whether you would like an income paid to your spouse after your death and if so, their sex and age
- Whether you are happy to have a higher initial income which remains level throughout your life or wish to build in an element of inflation proofing which will mean receiving a lower initial income
Importantly, annuity rates themselves fluctuate according to interest rates, gilt yields and life expectancy.
Different types of annuities are taxed in different ways so that pension annuities will normally be taxed as income, whereas an annuity effected for investment purposes may well be payable partially tax free.
It is important to note that once an annuity has been purchased, it cannot be amended or encash or assigned to another party. In the majority of cases, annuities are payable for your lifetime and will cease on your death unless you have included a widow/widower’s pension or a minimum guaranteed period.