What Exactly Is an Annuity?

It’s very surprising how few people actually know what the word annuity means, and what’s more interesting is that the majority of people actually do know what one is, they just know it by a different name. In short, an annuity is what most people probably know as a pension. You see, the pension itself is the pot of money that you accumulate over your working life for retirement, but the actual plan that pays you money each month thereafter is often known as an annuity. To put it simply, many people will use their pension to buy an annuity.

It’s important to note that not everyone will buy an annuity. Final-salary pension schemes already incorporate a monthly payment in retirement, and the state pension, which is paid to nearly everyone in the UK (subject to some criteria), is not related to an annuity.

Pros and Cons of Annuities 

It’s not necessarily essential to buy one either. The 2014 budget means that individuals with defined contribution pensions are no longer required to purchase an annuity, and are free to get advice on what might work for them, which might include investments like property. Independent advice from companies like PWMS is essential in this regard.

Still, it is expected that most people will carry on buying annuities because, crucially, they have rates of interest to beat inflation. Shopping around to find the best offers is one of the most important considerations before retirement.

Not everyone will get the same product either. Those with shorter life expectancies will receive larger payments each month, because the provider will gamble on the fact that they won’t have to make as many monthly payments. This point is critical to remember – annuity providers do want to make a profit, so they’ll compete to offer the best deals. No two companies are equal in this respect.

Understanding Pensions

It’s very important that you understand your own pension scheme, no matter what stage of life you’re at, but if you’re starting to think about whether or not it’s time to retire, then it’s definitely worth doing research into annuities. They can be a good option if you’re not prepared for the hassle of investment, and don’t want to manage a single lump sum of money. It’s essential that you get yourself clued up beforehand; good advice is priceless, and with annuity rates ranging from terrible to fantastic, it’s really worth knowing what you are doing before you make the commitment.