An annuity is effectively the exchange of a lump sum in return for an income.
Compulsory purchase annuities relate to pension funds and the rules state that you must purchase an annuity or alternatively secured pension with your pension fund (net of any tax free cash entitlement by a maximum age of 75.
Purchased life annuities relate to non-pension monies and allows someone with a lump sum of capital to convert that to a regular income for life if they wish.
Basic conventional annuities have a number of different options:
- Level annuities – these pay the same level of income for life.
- Escalating annuities – under this option your payment will increase every year, although you should remember that this means your income will initially start at a lower level and will take a number of years before it reaches the level available from a level annuity.
- Spouse’s pension – this option allows you to ensure that your spouse will continue to enjoy an income (typically 50%) should you predecease them. Again this will usually mean a lower starting pension because of the probability that your annuity provider will be paying out for longer.
- Guaranteed period – you can opt to have your pension paid for a guaranteed minimum period even if you pass away during this period. Typically the options are either 5 or 10 years. This can make a small difference to the pension payment you receive, again because of the possibility of the annuity provider paying out for longer than your natural life.
There are also other types of annuities such as with profit annuities, unit linked annuities and temporary annuities which give different levels of flexibility depending upon your requirements.
There is also the option of income drawdown which allows you to draw any tax free cash entitlement and then draw an income between government set guidelines, which can be varied depending on your requirements.
What are Immediate Annuities? Immediate Annuities enable you to draw income from your pension fund now rather than at a future date.
What are Impaired Annuities? It may be possible to obtain even higher annuity rates if you are suffering or have suffered from a number of medical conditions that could affect your life expectancy. For example high blood pressure , cancer, strokes, heart attacks etc.
What are Variable Level Annuities? Variable Level Annuities can either describe Escalating Annuities or With Profit or Unit Linked annuities where the income received will vary depending on the performance of the underlying investments.
What is a Single Payment Annuity? An annuity is a single payment given to an insurer in return for a regular income for life.
What are Fixed Payment Annuities? A Fixed Payment Annuity is another name for Level annuity where your income is fixed at the outset for life.
What are RACs? RACs are retirement annuity contracts (section 226 pensions) and were the predecessors of personal pensions.
What are Section 32 annuities? These are also known as section 32 buy-outs. A section 32 annuity allows people to transfer company pension scheme benefits to a private fund. The section 32 scheme is designed to mirror the benefits of the previous company scheme, but ultimately an annuity will need to be purchased.