Annuities provide a guaranteed income for life. A lump sum is used to purchase an annuity from a life company. The company will quote a rate of return, which will be based on an estimate of the life expectancy of the annuitant, coupled with interest rate levels. The older the annuitant is at the time of purchase, the higher the annuity for a given sum. An annuity payment (other than a pension annuity) is deemed to be part income and part repayment of capital, normally on the death of the annuitant there is no residual value.

It is possible to have an increasing annuity with the payments increasing by a fixed percentage each year, though this means that the annuity at outset will be lower. It is also possible to have a guaranteed period of payment, so that all is not lost if the annuitant dies after one or two years.
Joint life, second survivor annuities are paid to a couple, continuing until the death of the second partner. Because of the increased life expectancy on two lives, the rates are normally lower.

Annuities are a key element in pensions provided by all money purchase arrangements. Though it is not compulsory to take an annuity for many people it is the obvious choice.