In the main, the underlying ‘annuity fund’ is usually invested in fixed interest investments, such as long-term Government gilts, in order to maintain the guaranteed income agreed at the outset of the policy and ensure regular payments are made to the annuitants.
The level of income that you will receive from an annuity may depend upon many factors, such as:
In addition, annuities can be set up to provide various benefits/options and these must be selected at inception of the annuity:
It is important to understand the options available to you when you buy an Annuity. Like all things, there are pros and cons to each and which option suits you will depend upon your circumstances, attitude to risk and personal preference.
Level Annuities provide an income that will not increase in payment over the term and offers the annuitant the highest level of attainable income from outset compared to other annuity options. However, as time passes and inflationary increases take effect, the value of the pension income, in real terms, decreases.
Joint-life Annuities will continue to pay a level of income to a surviving spouse on death of an annuitant and are therefore generally taken out by married couples, where one may have no pension provision in retirement.
Guaranteed Annuities ensure that the income to be paid on the death of the annuitant is guaranteed for a set level of time, say 5 or 10 years. This option is likely to reduce the initial income taken.
Esculating Annuities will provide an income that will increase annually at a predetermined rate set at outset of the annuity, for example 5% esculation per annum or RPI, in order to cushion the effect of inflation in future years. This option is likely to reduce the initial income taken.
There are several other Annuities available on the market and therefore advice is recommended prior to the purchase of an Annuity in order to take benefits that will suit you from the outset.