Annuities: What Seniors Need To Know About Them

Turning your pension fund into a pension income is one of the most important financial “dilemmas” that you will ever have to deal with in your life. Unless you retire with a final salary pension, you normally have to convert your pension fund into a retirement income. This buyer’s guide is designed for seniors who are considering purchasing an annuity. Its purpose is to assist you in determining your insurance needs and the annuity products that will fill your needs. For useful information, we recommend that you continue reading. It's crucial to spend time shopping around because once you've bought an annuity there's no going back. Make sure you get it right the first time and you can guarantee yourself good retirement income.

What is an annuity?

An annuity is a financial contract but in the form of an insurance product. It is the only retirement financial product that will guarantee an income for life. Annuities are also a good way to make sure you do not outlive your income.

In its essence, it is a financial contract which, in return for the lump sum of your pension pot, will pay you periodically a fixed sum for the rest of your life. The annuity provider will use your pension fund to invest in assets.

Experts say that the best time to consider buying annuities is when you are between 45 and 55 years old. But as annuities are complicated to understand it is better to go to a pension advisors just be informed that there is a commission fee which ranges between 6 and 8 percent on the premium amount based on the longevity of the annuity.


What types of annuities are there?

• Fixed annuity: means you will benefit from interest on the funds deposited into the annuity on a fixed rate basis.

• Variable annuity: means you will benefit from interest on the funds deposited into the annuity on a variable rate basis. The variable interest rate depends on the investment options chosen by the annuity owner. If your investment choices are successful, your annuity will grow and vice versa.

• Indexed annuity: means your earnings will be based upon an interest rate that is tied to the performance of a common or well-known index such as the Standard & Poor's 500. You will receive regular payments just like with the fixed annuity.


Annuity rates

Your annuity rates (interest rates applicable to your annuity) will typically be based upon the following criteria:

• Age: some annuity providers pay higher annuity rates if your life is likely to be shorter than average;

• Health: some annuity providers pay higher annuity rates if you have had a certain illness or are a smoker or are overweight and any other health issue that threatens to reduce your life expectancy.

• Postcode: some annuity providers pay higher annuity rates if you live in a particular part of the country or have previously worked a certain high-risk profession.

• Gender: irrelevant as of December 2012.

Bottom line: Speak to an IFA if you have any doubts or questions.

The information on this page is designed to help you understand more and make more informed choices. We do not receive any commissions, instead we are funded from companies that we advertise on our website.

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