Conventional Annuities - What is an annuity?

Conventional Annuities

What is an annuity?
Contributing and building up a sizeable pension fund is important but more vital will be how the fund is eventually converted into an income when you retire.

Under current pension rules a conventional annuity must secure a guaranteed, predetermined income for life on retirement. This can be at any time after age 50 years and is compulsory at age 75. This pension income is known as an ' annuity' and entails the investor passing their pension fund capital over to an insurance company in return for an income for life. When converting the fund into an annuity the investor can often withdraw up to 25% of the pension fund as a tax-free lump sum.

As all pension holders are not the same and will have different requirements and financial objectives so there are a number of different types of annuities. The following list provides some examples:

	This annuity provides	Benefits	Disadvantages
Level Annuity	A guaranteed level of income for the lifetime of the pensioner.	A Known and hight level of income that will not fall.	If inflation reappears the purchasing value of the income will reduce.
Escalating Annuity	A Level of income that will grow annually in line with a predetermined % level or, if desired, linked to inflation.	Income will rise in line with the levels chosen and may maintain the real value of income.	The starting level of income is dramatically lower than a level annuity and can take as long as 10 years to catch up.
Guaranteed Annuity	This guarantees a level of income for a predetermined number of years regardless of how long the investor lives.	Useful for those concerned that dependents continue to benefit in the event of early death.	Again, the starting level of income will be reduced depending upon the guaranteed term selected.
Spouses Annuity	Will provide an income for a spouse or dependents in the event of the annuitants death	You may select a % of your annuity to be paid to your survivor this is typically 50-75% of the annuity.	A reduction on annuity of typically 15% if selecting a 50% spouses annuity.
Special Rates Annuity (Lifestyle annuities)	A higher annuity rate is available from specialist providers for those in poor health or are overweight, or/and smokers.	A Higher income level is achievable.	The market is not generally seved by the larger AAA rated providers - this may provide a disincentive to some investors
Unit Linked and With Profit Annuities	The ability to link the annuity income to the performance of an investment fund of the investors choosing. Investors may choose the type of investment profile suited to their circumstances and objectives.	There is potential for the annuity to provide an increasing income and the investor initially has control over the starting level of income by assuming a growth level.	If the funds selected do not perform as well as initially assumed by the investor then income can fall.

Comparative Annuities

Draw-down Pensions

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