An annuity is a product which provides an income for life. In fact, it guarantees an income for life. When you buy an annuity you are essentially paying for a sum of cash to be paid to you at regular intervals after you retire and until you die.
To buy an annuity you need to have been paying money into a pension fund whilst you have been earning an income during your working years. Upon reaching retirement you will have built up a pension pot and this can be used to buy an annuity.
You can buy your annuity from the company which provided your pension. Or you can go elsewhere, to another provider, where you might find better rates.
How they work and who they are for?
Although an annuity is connected with pensions, it is often considered to come under the insurance umbrella. This is because you are effectively buying yourself financial cover for your retirement. As such, a number of factors will be taken into consideration by your annuity provider when calculating the sum you will receive.
Your age and gender will be considered. And the provider will also look at your health and lifestyle because the rate you will receive is largely based on your life expectancy.
How your annuity is paid depends on your circumstances. If you would like your partner to benefit from your annuity after you die you can buy a joint-life annuity, if you want to be the sole beneficiary - you can buy a single-life annuity. You can also buy annuities which pay more as you get older, or which pay set amounts at different stages in your retired life.
Pitfalls of Annuities
Statistically, women live longer than men. So with a higher life expectancy females are more likely to receive a lower income from their annuity. As well as gender, your age could also lower your income.
A joint-life annuity, whilst giving peace of mind that your dependants are covered should you die, comes with a price and is more expensive than a single-life scheme. If you are not married or in a civil partnership you should check with your provider to ensure your partner will benefit.
Some annuities are not very flexible and if prices increase, rates could reduce. For this reason it's really important to check details of annuities before you buy them and even seek help from a financial adviser to guarantee the product you buy suits your needs.
Where to buy your Annuity
It is advisable to start thinking about your annuity several months before you retire and begin scouring the market for the best deal. As mentioned, a financial adviser will be able to provide you with help on which type of annuity to buy. You might be happy buying it from the provider of your pension. However, if you decide to go with the open market option and buy your annuity from another company, you will need to transfer your pension to that firm first.