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What is an Annuity?

In simple terms, an annuity is a contract bought using your pension pot. Annuity provides a regular income throughout retirement for the rest of the policy holder's life. This income goes beyond anything from the state or from a previous employer.

As retirement approaches, if you have a personal pension, your provider will contact you with an offer on an annuity. As a contract, once an annuity agreement is signed, there's no going back – and it is highly unlikely this initial offer is the best deal you could get, so you should not accept it automatically. For more information on this, see our retirement planning guide

Single Lifetime Annuity

This conventional pension annuity is obtained from a life insurance company using the funds from a pension pot, and transferring them into fixed investments. This annuity secures a guaranteed, risk free income for the life of the annuitant (policy holder), ceasing with no further payouts when the annuitant dies.

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Short Term Annuity

This temporary annuity (sometimes referred to as a Phased Drawdown) works in much the same way as a conventional pension annuity, however the difference being, only a part of your pension fund is used to buy it. As the name suggests, this annuity will only run for a short period, paying an income for up to 5 years or up to age 75 (whichever occurs first). This option provides the choice of ‘level’ income payments or an increase each year at a fixed rate or in line with the Retail Price Index. Essentially, this short term annuity allows one the opportunity to shop around for a lifetime annuity rather than buying one immediately at retirement and not being able to go back on it once the contract has been signed.

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Variable Annuity

A combination annuity, this particular option has the partially guaranteed (but less secure) income of the conventional annuity, but with the possibility of increasing of the investment-linked annuity, offering flexible options as your needs change.

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Unit Linked Annuity

This is essentially a lifetime annuity; however, your pension pot is invested in units rather than one lump sum. Depending on how well your investments perform, directly affects the annuity income. This is a medium to high risk annuity. Investment options include:

  • Tracker fund – closely follows the performance of a particular stock market related index. Quite often, the charges will be lower than that of a managed fund.
  • Medium-risk managed fund – money is spread across various shares and other investments, reducing risk.
  • Higher-risk managed fund – money is less widely spread across shares and other investments in a particular sector, therefore the risk is higher.
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With Profits Annuity

This annuity is low to medium risk, however, it is more complex than other options as it combines an income for life with investments in the stock market. It’s possible for the level of income to go up or down in line with the investments selected. Fortunately though, this annuity guarantees the income will never fall below a particular minimum level over the longer term. Investment growth can keep income higher than inflation.

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Flexible Annuity

Providing more flexibility and control over income than other annuity options, finances can remain in chosen investments until you are aged 80 or over. This annuity provides an income for life, but being directly linked to the performance of investments the income is unguaranteed and could in future years be lower than they were when the annuity was originally bought.

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Joint Annuity

A regular monthly income will be paid to the annuitant until the day they die. After that, the spouse or beneficiary receives a half, two-thirds, or 100 per cent of the monthly payment. A spouse can receive the payments until he or she dies, however, a ‘non-spouse’ beneficiary must receive full payment of the annuity within five years of the original annuity owner’s death. The non-spouse beneficiary also has the choice of a lump sum payment which must be taken within 60 days of the owner’s death. The annuity payments must commence within a year of the owner's death.

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