Definition of annuity

An annuity is a guarantee from an insurer that they will pay you an income for the rest of your life. In effect they insure you against a very long life and running out of income. Annuities can be structured in different ways. A person who buys an annuity (by transferring a lump sum to an insurer or by investing with an insurer over a number of years) can elect to have funds allocated to a next of kin should he or she die.  Increasingly providers are seeking to assess your life expectancy as accurately as possible. If a person has been a heavy smoker or is in ill health, or even lives in an area where people die sooner, it is possible to secure a higher annuity rate (annual or monthly payout) from the insurer who is effectively betting that you will die sooner. 

 

annuity in the news

In March 2014 the UK chancellor George Osborne, in what was dubbed the biggest overhaul of the UK pension system in decades, announced that pensioners would no longer be compelled to buy an annuity. A pensions consultant writing for the Financial Times applauded the move and called it a watershed moment. She noted the changes meant anyone with less than £30,000 worth of total pension savings could now take the money in cash (up from the current £18,000 limit); while the restriction that allows only two small pension pots of up to £2,000 each to be taken as cash is to be turned into an allowance of up to three funds of less than £10,000 each to be cashed in – and still a quarter can be taken tax free. She noted that restrictions had usually lead to people with smaller pension funds buying poor-value annuities.