An annuity is a product that you buy from a life insurance company. You usually buy it with your pension fund, but some can be bought with other money that you may have from savings or elsewhere.

The annuity will then pay you a regular income throughout your retirement. Whilst you might think that you could be better off just living off the money as savings, annuities are specifically designed to guarantee you an income for the rest of your life. And trying to budget so that you have enough money to last a lifetime would be virtually impossible, and as none of know how long they’ll live and it would be easy to overspend.

Just as interest rates on different high street savings accounts vary, so does the income that each life insurance company offers on their annuities. These can also fluctuate quite regularly as they depend on market conditions at the time of buying. Tell me more about annuity rates

As well as the size of your pension fund or savings, and annuity rates at the time, other personal factors will be taken into account in determining how much income you will receive:

• Your sex The income from the same amount of money is higher for a man than for a woman, even if they are the same age because, on average, men don’t live as long as women.
• Your age The older you are, the higher your annuity payments are likely to be because it is expected that an older person will live for fewer years from now than a younger person.
• The options you choose to add to your annuity There are a range of options that can be added to your annuity, such as a spouse’s pension, and each of these extra features will affect the rate you receive.

For annuity rates, a life insurance company has to work out how long you are likely to live. Not surprisingly, the income will vary for each person according to their own circumstances. In order to get the best rates it is a good idea to shop around to make sure that you choose the most suitable product for you.

Everyone is different and annuities come in all shapes and sizes to fit. There are lots of extra features that you can add to your annuity to tailor it to your own personal circumstances. When assessing these, you should carefully consider both your future needs and your needs now.

The features you choose can have an effect on the income you receive. Generally, the more options you add the more it will cost you. However, some options may hardly impact on your income at all.

There is usually flexibility over when you receive your income, which can be monthly, quarterly, half yearly or yearly.

You can also choose to have it paid either in advance (so you get a payment from day one) or in arrears. If you choose to be paid in arrears then you will get a slightly higher income. This means that you will have to wait for your first payment, and your annuity income will be paid at the end of a specified period (e.g month or quarter).

Inflation is a fact of life, and if your income remains the same year after year, the rising cost of living will mean that the amount of things you can buy will decrease each year.

To help avoid this decrease to the value of your income, you can choose for your income to increase each year. This increase is usually fixed, or linked to the rate of inflation.

Bear in mind though that choosing this option will result in a lower starting income. The key is to balance what you need now against what you are likely to need in the future.

If you have a dependant who relies on you financially e.g. a family member, spouse or civil partner, you might want to buy a joint life annuity or a spouse’s pension as this will continue to pay them an income after you die.

Whilst some schemes will offer a dependants pension as standard, others provide this as an additional option. Choosing this option means that when you die, an income is paid to your dependant, this can be for a limited term or for the rest of their life.

This option can also be referred to as a partner’s pension or a reversionary pension because the income reverts to your dependant.
 
You usually have to name this person when you set your pension up, and you can specify the percentage that they will receive. This is typically between 50 and 100% depending on the type of pension scheme you are in. This amount, as well as the age of your dependant will have an affect on the amount of income that you will receive.

Choosing this option has benefits if you want to leave your pension to someone after you die.

It’s important that you remember that your income will be treated as earned income and will be taxed in the same way as you were taxed when you were working.