What are Pension Annuities?
An Annuity, is an insurance contract which pays an income for the term of the contract. The income is calculated to repay the capital and interest for a given number of years, using mortality tables to decide on your life expectancy.
If your demise is less than this period, then the Annuity provider is in front, if you live longer
then you are in front of the system. Over time, if the mortality tables are correct, then these two sides should balance out.
By buying an annuity you are exchanging your pension fund for an income for the rest of your life.
The terms of the annuity are fixed at outset and once started cannot be changed in the future.
The income from a standard annuity is based on the interest rates in force on the day when you buy the annuity. This is because annuities use gilts (fixed interest Government stock) to provide the retirement income. As a result, annuity rates are generally high when interest rates are high. However, if interest rates are low, the yield from gilts is reduced and the income from a standard annuity will be less.
There are three main types of annuity; there are a number of variations of each type.
- Immediate annuities; where an income is paid from day one of the purchase of the annuity.
- Deferred annuities; where the income from the annuity starts to pay out at a given date, some time in the future.
When you extend the range of a life annuity by continuing payments to a second person, Joint and Survivor annuity or for a guaranteed minimum period of time Period Certain annuity, the extra coverage may reduce the monthly payment by approximately 5% to 15%.
