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About Annuities

An annuity is a policy that converts your pension pot into a series of regular income payments for the rest of your life no matter how long you live.

When you purchase an annuity the insurance company invests your money in very safe assets and pays you a regular income every month (other frequencies are available) for the rest of your life. If you select a joint annuity, and you die before your spouse or partner, the income will continue to them for rest of their life.

Income for life

The amount of income payable from an annuity depends on a number of factors including:

  • Your age and health – the older you are the higher the income payments and if you have certain health conditions you may qualify for an enhanced annuity
  • Interest rates – annuities are priced in relation to the yields on long-term fixed interest investments so when yields are low annuity rates are low and vice versa
  • The options selected – e.g. single or joint life, level or escalating, income guarantee period or value protection and choice of payment frequencies.

Enhanced Annuity - You might be able to get a higher annuity income if you smoke, are taking prescription medication or have recently had medical treatment for a condition. You may qualify for an enhanced annuity which may result in a higher income.

More about annuities

Most annuities pay a guaranteed income for life and have the following characteristics:

  • They pay an income for the rest of the policyholder’s life, no matter how long that is
  • They are based on the principle of ‘mortality cross subsidy’
  • Enhanced rates are available for those in poor health
  • On death, payments stop unless a joint life annuity, a guaranteed payment period or value protection option has been selected
  • Payments can remain level or increase each year

In order to meet the income for life promise, annuities are based on the concept of mortality cross subsidy.

Mortality cross subsidy is unique to annuities and clearly favours those in good health who may live longer than expected at the expense of those who die early. To overcome this problem some insurance companies provided enhanced annuities. Enhanced annuities pay a higher income for those who have a medical condition that may reduce their normal life expectancy.

The person who purchases an annuity is called the annuitant.

An annuity converts your pension pot into a series of regular income payments


Annuity options

There are many different annuity options such as:

  • Single V Joint
  • Level or escalation

Enhanced annuities

An enhanced or impaired life annuity pays a higher income because an allowance is made for any medical conditions which might reduce life expectancy

You will probably qualify for an enhanced annuity if you can answer yes to one of the following questions: Do you smoke, Are you taking prescription medication, Have you been to hospital recently for a medical condition?

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This website is run by William Burrows and publishes generic information on annuities, drawdown and other related retirement income matters. Any information you use is at your own risk and does not constitute financial advice.

If you require financial advice you will be advised by Better Retirement where William Burrows is authorised to give investment advice. Better Retirement Group Ltd is authorised and regulated by the Financial Conduct Authority, reference number 153420.