Annuities

An Annuity is an income for life! Essentially, you hand over a lump sum, say £100,000 and somebody else, usually a life insurance company will guarantee you an income until your death. So, an annuity is like the reverse of a mortgage. Instead of getting lump sum and then paying back monthly amounts to your home lender, you hand over a lump sum and receive monthly payments until you die.

The rate of income you receive from the annuity will depend on how much capital you and over and how old you are. A healthy 65 year old man will receive a smaller income than a 70 year old man, because the 70 year old is not expected to live as long ! Because women tend to live longer than men, life insurance companies tend to offer them lower annuity rates.

The life insurance company selling you the annuity will be able to offer you higher yields than you will be able to get by investing in a fixed interest stock, like a gilt. The reason is that when you take out an annuity, you are taking a statistical gamble on how long you're going to live. If you buy a "non guaranteed" standard annuity, you could hand over £100,000 one day and die a week later, allowing the life company to "scoop the board". On the other hand, after handing over your cash, you may live 40 years, thereby confounding the life insurance company's experts who reckoned your life expectancy would only to 20 years ! In addition to life annuities which stop paying out on death, some known as "guaranteed annuities" pay out for a fixed term, regardless of when you die. Because the life insurance company knows with certainty for how long it will have to pay out, the level of payment is often lower than it would be on a non-guaranteed annuity payment.

There are other types of annuities, for example joint life annuities where the capital is handed over to the life insurance company which then pays an income for the life of both spouses.

Annuity rates vary and are influenced by the prevailing level of interest rates in the economy.

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See also: Financial Services, Mortgages