The Basic Types of Annuities

The Basic Types of Annuities
  • Opening Intro -

    As a once in a lifetime choice, picking the right annuity to convert your pension pot into regular income is easily the most important financial decision that you will have to make.

    As is standard in the large and complex insurance and pensions market there are literally thousands of products out there.

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In the face of such choice, the main thing to focus on is getting an understanding of the basic types of annuities. To start the process, you can try looking at the information at legalandgeneral.com, which describes two main types of annuities: the pension annuity and the with profits annuity.

Pension annuities, often called conventional annuities, are by far the most popular choice, as these policies provide an income for the rest of your life that will not decrease. Conventional annuities can either provide a fixed or a varying income. The fixed income option is obviously the most straightforward, as you will know exactly what your annuity is going to deliver every year for the rest of your life. However, inflation will of course diminish the spending power of this income over time.

Escalating annuities are the variable option, and can be set to either track an inflation index such as RPI, or increase by a set percentage each year. The cost of arranging an escalating annuity is a reduced income from the outset. It is common for escalating annuities to deliver an income that is initially 30% 40% lower than a level annuity would deliver, so there is a careful balance to consider. The inflation rates of the future have a large bearing on when the escalating option will pay off, as does how long you will live. For an illustration of this point, try looking at the http://www.moneysavingexpert.com/savings/annuity-guide site.

Those with a reduced life expectancy due to underlying health problems, or habits such as smoking, can often benefit from disclosing these conditions to the annuities provider when arranging the deal. Enhanced annuities provide more income for the same pension pot to those who are statistically likely to die earlier. While enhanced annuities were previously only available to those with quite serious problems, there are now a range of conditions such as being overweight, abnormal blood pressure, or having high cholesterol that can mean that you qualify for enhanced annuity income. It is reckoned that around 40% of people could be buying an enhanced annuity, while at present only around 10% do so which means that it is worth getting a medical check up and eye test before buying an annuity, even if you feel in good health (eye tests can disclose a number of previously undiagnosed, underlying medical conditions).

The with-profits or investment style annuity is similar in a lot of ways to many pensions, in that the income yielded is dependent on the performance of an investment fund. If things go well an investment-linked annuity can provide enough funds to counter the effects of inflation, but as with all investments there is also a risk of poor performance, and a reduced income. However, most with-profits annuities come with a guaranteed minimum level of income, regardless of the performance of the fund.

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Comments

  1. Christie Hartshorn
    Christie Hartshorn 22 August, 2012, 10:13

    Very clear definitions about differences of annuities. Whatever annuity you want to purchase it’s better to choose whats annuity type are good for you. Don’t forget to consult first to a professional financial adviser before grabbing one.

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