What are Annuities?
Posted by David in Annuities on 16th of August 2011Annuities, also referred to as a lifetime annuities are financial contracts which may be bought from an insurance company in exchange for an individual’s pension fund(s) to provide them an income when in retirement.
An insurance company will in exchange for an individual selling their pension to them provide instalments as annuities to the individuals which will count as income for their retirement. The annuities instalments may be chosen by the individual on how they are to be paid as either monthly or yearly for example but there are many payment options available.
Payments of annuities are not the only type of payments that may be received by individuals in retirement however. When such a person reaches 55 they may immediately begin taking their pension benefits allowing them to take up to 25% of their pension fund as a tax free cash lump sum allowing the residual amount to be used to purchase annuities or may even be left in the fund to continue to grow.
Should annuities not be desired by the client but they still wish to receive an income from the pension funds however, they may take other options such as income drawdown which is similar to that of taking annuities in that it provides an income but is also different to annuities as the pension funds are not sold to insurance companies but instead actually stay in the pension scheme funds where they may continue to grow but at the same time allow the person to take income up to 100% of the GAD limits from it.
State Benefits such as the Basic State Pension and additions to it such as the State Second Pension may also be used to supplement annuities. These may be taken by age 65 currently for men and soon for women, although the age is rising to 68 for both and provide a weekly income. Many people overestimate that value of these and as such underfund their other retirement provisions and it is therefore recommended by the Government that everyone opens up their own pension fund to provide an income in retirement in addition to the State provisions.
How do Annuities Work?
When your retirement date approaches you perhaps may decide to consider annuities as your provision for retirement and it would be wise for you to contact a financial advisor to seek advice on what annuities would be the best option for you to take, you shouldn’t just accept the one that is offered to you after all.
If annuities are decided to be the option you wish to take then you should consider the fact that the income rates you may receive will depend on various factors such as your state of health (which may provide you with an enhanced annuity), current annuity rates, age at retirement, gender and what guarantees you decide to take such as escalation. Once these have been calculated and considered by the annuities provider they will then offer you the annuities payments suitable to your circumstances.
For more information concerning pension release please contact the authors website.
