Annuities

What is an Annuity?  An Annuity is a type of retirement income that is purchased with a capital sum. It provides a regular income, either for life or for a fixed term, payments from an Annuity are usually made monthly, quarterly or annually.

There are a number of different types of Annuity available - and variations within each type.  This page provides a brief explanation of some of the main annuity types and variations available.  More detailed information will be found on some of the links.

How do Annuities work?  Annuities pay an income from a combination of the capital and the earnings from the capital.  Annuity providers guarantee to provide a defined amount from their funds.  Fund managers are required to manage their investments and the prices for new annuities in order to balance the fund value against their liabilities and risks.  Trends on interest rates, investment performance and life expectancy will all affect the price of annuities (or more likely the income that can be purchased by a given capital sum), but once purchased, the annuity income should remain secure.

Annuity Types

Allocated Annuities - An investment in which you can only invest a lump sum superannuation or pension fund payment.  Provides an opportunity for capital growth as well as a regular and flexible retirement income.

Immediate Annuities - Once purchased, provides an immediate guaranteed retirement income stream either for the life of the holder or for a fixed term.

Deferred Annuities - An annuity that has been purchased, but does not commence payments until some time in the future - e.g. on reaching a specific age.

Fixed Term Annuities - pay an income for a fixed term (e.g. 1 to 25 years).  If the holder should die before the end of the term, any capital balance remaining should form part of their estate.

Lifetime Annuities - pay an income for the rest of the life of the holder.

Annuity Variations & Options

Guarantee - With a guarantee, if the holder should die within a specified period, some or all of the capital remaining will be paid to their estate.

Joint Life - The annuity continues to be paid whilst either of the holders survive.

Escalating - The amount paid increases either at a fixed rate or in line with a specified inflation index.

Reduced Life Expectancy - Some companies provide annuities that pay a higher income to people who can demonstrate a reduced life expectance - for instance smokers.

Shop Around.  Buying an Annuity is a major commitment that may affect the rest of your life and your estate.  Before purchasing or committing to a specific Annuity compare various products and options to understand how they meet your needs and fit in with your retirement needs, expectations and plans.

Use an annuity calculator to: compare what different annuity schemes will provide for you; calculate the size of the fund you will require and how much you need to be saving to achieve your retirement goal.

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