Annuities Explained

by admin on June 19, 2010

With UK inflation rates steady at between 1.5% and 3% per annum, it is possible to have annuities explained in a simple fashion. They have become a sensible hedge against financial hardship in the later years of our lives, when we retire from full time employment and rely on Pension provision for our annual income.

In general we are living longer nowadays, and annuities are principally related to statistical evidence regarding male and female life expectancies. Men still have a shorter life expectancy than women. Traditionally this was because men worked longer hours, and often in more arduous jobs than women.

Although this tendency has changed over the years, the general ‘truism’ regarding length of life has not changed significantly. Other factors which have to be considered are the general health of the person wishing to buy into an annuity, and the type of annuity required.

In essence, there are two main options. The first type is paid to the person taking out the annuity, to be paid on a regular monthly basis after they reach an agreed age. There will usually be a specification that they must have been paying into the annuity scheme for a minimum period (usually ten years) before making a claim. In many cases, there is an initial ‘lump sum’ payment, followed by regular monthly amounts.

The second option is an annuity paid to a surviving spouse on the death of the named person. It is always possible to add extra features to your personal annuity plan in order to make such thoughtful provision for other family members, and protect the plan against inflation by increasing the monthly payments.

This is called the Open Market Option. One possible drawback with the annuities explained is that it may have the effect of reducing the level of income slightly when the policy first matures, but it gives better protection against loss of the real spending power of the pension income over the longer period.

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