Product Guides
Retirement
Annuities
An annuity is essentially an income for life, which is purchased with your pension fund, (either net or gross of any tax free cash). This income is paid for the whole of your life, and is guaranteed. This income is also chargeable to Income Tax, but does not attract National Insurance liabilities.
The amount of income the insurance company offers you in exchange for your pension fund is called the 'annuity rate'. Annuity rates can vary and you don't have to buy your annuity from the company that's managing your pension fund. An annuity pays you an income for the rest of your life. Unlike other investments, it cannot be used up - however long you live.
Once you have bought an annuity there is no way back - you have permanently exchanged your pension fund for a lifetime income. You might think that this is something of a gamble and you would be right - there are winners and losers.
Life insurance companies have to calculate the annuity rates they offer people on the basis that some people will live longer than others. Obviously people who live longer than average will draw more from their annuity than, for example, someone who dies three or four years after retirement.
Those people who die fairly early actually subsidise the annuity rates for those who live longer. But as average life expectancy rises over time, insurance companies have to adjust annuity rates to take account of the fact that people are living longer. Interest rates also affect annuity rates.
Guide to Retirement
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