Annuities
An annuity is a contract between an insurance company and a pension scheme member under which the member hands over all or part of their pension fund to the insurance company which agrees to pay out an income to the scheme member for the remainder of that person's life. The annuity would normally be paid monthly, quarterly, half-yearly or annually.
If you have an Occupational Pension, your employers will normally arrange your annuity when you come to retire.
If you have a Personal Pension, your pension provider will contact you with an offer of an annuity. You do not have to accept their offer & can choose another insurance company to provide you with an annuity.
The amount of the annuity may stay the same throughout the years of payment or may have automatic annual increases built in. These increases may be at a fixed rate, e.g. 3% per year, or the rate of increase may vary, e.g. with the annual change in the Retail Price Index.
The annuity can be set up so that all or part of it reverts to your spouse or partner in the event of your death. Also they can be set up so that they are payable for a minimum period, say 5 or 10 years, even if you die before that period ends.
The value of the annuity is dependent on two factors – the size of the pot and the annuity rate offered by the insurance company selling the annuity.
Annuity rates are calculated by actuaries using various factors – mortality, interest rates, age, gender and sometimes health. In general terms, annuity rates are higher the older a person is because future life expectancy is less. In the same way men get higher annuity rates than women of the same age due to men having lower-life expectancy.
In addition, enhanced annuities are available to those who have a shortened life expectancy due to poor health. These are known as impaired life annuities.