What is a Pension Annuity?

If you’ve saved money into a personal pension then there are lots of ways you can transform your savings into a regular income for your lifetime. One option is to purchase a pension annuity.

How does a pension annuity work?

When you purchase an annuity, your insurer converts the lump sum you pay into a secure income that will be paid to you on a regular basis. This type of scheme presents little risk to the retiree and provides a fixed interest investment that can provide a substantial guaranteed income, dependent on the amount of money you invest.

When you invest a lump sum the insurer will calculate how much income you will receive from it. the insurer uses various methods to calculate the income you will receive including your most likely life expectancy, your age, your gender, current interest rates and in some instances the state of your health. In simple terms your regular income will be calculated by dividing the amount of the lump sum you pay by the number of years you are expected to live.

You may be wondering what’s in it for the insurers? They make money if people don’t live as long as expected as the remaining money in the lump sum is not returned to their family. This allows them to pay for people who do live longer and make a profit. This is known as mortality cross subsidy.

Your options for pension annuity

Once you’ve chosen a pension annuity option it is fixed, meaning you can’t withdraw it or change it, so it’s extremely important to make sure you choose the right pension annuity before you make an investment.

Joint and single pension annuities

Single pension annuities pay a higher rate of interest than joint pension annuities, but if someone holding a single pension annuity dies their money cannot be passed on to their spouse or family members. When you choose a joint annuity you can decide what percentage of the pension will be given to dependents or your spouse when you pass away.

Protecting your pension annuity payments

Most insurers offering pension annuity schemes will offer the investor the option of being able to have their investment returned to their dependents if they die before the age of 75.

Pension annuity comparison

If you want to ensure that you choose the right pension annuity for you then start by using a pension annuity comparison site which will show you lots of different schemes from different providers, helping you to weigh up the pros and cons of each scheme before you make a decision.