Annuities are used to provide a pension income, in the case of pensions this income is guaranteed for life. The pension fund is exchanged for a pension income. Once the annuity has been bought, the income is fixed, the contract cannot be reversed - the pension fund 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 level of Investment
- Age of 'annuitant'
- The prevailing annuity rates at the point of annuity purchase
In general, the older an annuitant the higher the income which can be secured.
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 e.g. 5%.
- Annuity income can be linked to investment performance for example by a 'With Profit Annuity' or 'Unit Linked Annuity'
Further details can be found under the following headings:
With Profit Annuities
Since April 2011 investors have the freedom to choose when and how they take their pension with the compulsory annuity age of 75 being withdrawn.