What is an annuity? An annuity?

In the simplest of terms, an annuity is an income for life provided by an insurance company in exchange for your pension fund or a lump sum of money. The larger the pension fund or lump sum, the larger the income from the annuity will be. You are
essentially converting your pension fund or lump sum into an income which is paid for the rest of your life.


There are some age restrictions for annuity applicants; in the United Kingdom you currently must be aged between 50 and 75 to apply, though it should be noted the minimum age will rise to 55 from 2010 onwards.


Your pension provider will usually offer you a lifetime annuity; however, you can
also shop around to see what rates other insurance companies provide. As with all
financial products you may be able to get a better rate simply by taking your time
to find the best deal for your circumstances, so investing a little time here could
pay off further down the line.


The overall search process can be helped by looking at a regularly updated and inde-
pendent annuity comparison service. You can also search different annuities online,
which can be done from the comfort of your own home.

Before comparing annuities, choose whether you would like your retirement income to remain at the same level for the duration of the policy, increase at a fixed rate each year, or change in line with the level of inflation. However, it should be
noted that the more you wish to have your annuity increase by each year then this
can reduce the starting income.


As with most financial arrangements, when choosing an annuity you must decide
whether it should pay an income to your spouse or partner after your death. The
income can continue in full or be reduced to a certain percentage of the original
amount.


If you decide to take out an annuity with your partner then having a joint-life plan
will reduce the income you will receive, as the annuity will need to be paid for a
longer period of time.


Before buying your annuity it is possible to take up to twenty five per cent of your
pension funds as a tax-free lump sum on retirement. This could provide a welcome pay-
out when retirement rolls around and is a good way to keep your options open, as the rest of your income will be paid via the annuity.


Be aware, however, that there are other types of annuities available so of course,
there is much to consider before taking out an annuity. After all, it pays to
understand what is best for your future so consulting a Financial Adviser can help
you to understand all the options.

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