An annuity pays you a guaranteed income for life. It is a policy that converts a lump sum (normally your pension pot) into a series of regular income payments for the rest of your life no matter how long you live.
Annuities are provided by insurance companies who invest your money in secure assets and will pay you a regular income every month (other frequencies are available) for the rest of your life. If you select a joint annuity, and you die before your spouse or partner, the income will continue for the rest of their life.
The amount of annuity income depends on a number of factors including:
Enhanced Annuity - You can get a higher annuity income if you smoke, are taking prescription medication or have recently had medical treatment for a condition.
Most annuities pay a guaranteed income for life and have the following characteristics:
In order to meet the income for life promise, annuities are based on the concept of mortality cross subsidy.
Mortality cross subsidy is unique to annuities and clearly favours those in good health who may live longer than expected at the expense of those who die early. To overcome this problem some insurance companies provided enhanced annuities. Enhanced annuities pay a higher income for those who have a medical condition that may reduce their normal life expectancy.