What is an Annuity?
An annuity is a policy consumers nearly always buy with their pension fund upon reaching retirement. The annuity, usually provided by insurance companies, then guarantees to pay you a fixed sum each month for the rest of your life.
Most people will buy an annuity between their 65th and 75th birthdays, depending on when they finish work and how much money they have in their pension fund.
It is currently compulsory to purchase an annuity by your 75th birthday, except for people who are part of a final salary pension scheme. These schemes are becoming less and less common as time goes on, as companies can no longer afford to fund such schemes with the average age expectancy increasing every year.
Annuity rates have fallen of late, with people are starting to live longer, and now offer a typical return of around 8% (although this will be different dependent on people’s circumstances). This means someone who saved £50,000 in their pension fund will expect to receive around £4,000 a year from their annuity provider for the rest of their lives.
The most important thing to be aware of when selecting your annuity is that you don’t have to take the annuity offered to you by your pension provider (and in most cases shouldn’t), as you can get a far better deal by shopping around.