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.