Annuities

Annuities

An annuity is a financial product offered by insurance companies which provides you with an income for life in return for a lump sum.

Once you’ve purchased the annuity you can’t get the money back and if you die soon after purchasing the annuity then the income you will have received may not be anywhere near the original amount invested. However you can take certain steps to safeguard against this happening.

The type of income you decide to take will make a difference on the amount of income you receive. Some examples are as follows:

Level Annuity

These are the most popular types of annuity because they offer the highest starting income but they are vulnerable to inflation. You can purchase annuities with inflation guarantees but you will have to accept a lower starting income.

Increasing Annuity

You need to think about your plans for retirement before considering an increasing annuity. If you want to maximise your income during the early years of retirement when you are potentially at your healthiest then this may not be the best option for you as this option will reduce your income initially.

Impaired / Enhanced Annuity

Annuity rates are related to average life expectancy but some companies offer higher rates to people with reduced life expectancies.

People who have severe health problems such as heart disease, diabetes or cancer may qualify for an impaired life annuity. You may also qualify if you are a heavy smoker or overweight.

Some options to consider before deciding on how to take your annuity would be:

Single or Joint Life

A single life annuity will pay you income until you die. However if you are married or part of a couple this could mean that your partner is left short of income! A joint life annuity will continue to pay some or all of the annuity income to your partner when you die. Opting for joint life instead of single will of course reduce the annuity income as it will potentially pay for longer.

Guaranteed Period

Opting for a guaranteed period will mean that the annuity income is guaranteed to be paid out, usually for either 5 or 10 years, even if you die during that period. The income will continue to be paid monthly to your survivor or sometimes can be commuted to a lump sum. Again opting for a guaranteed period will reduce the amount of income offered.

Value Protection

Some companies offer this and it allows you to protect up to 100% of your initial investment for a given period of time. The value protected sum assured reduces at the same rate as the total gross payments, reaching zero when the total payments made equal the sum originally invested.

This only covers you until you reach age 75 at which point the cover ceases. This is only available to people under age 75 at outset and can not be taken in conjunction with a guaranteed period.