An annuity is a contract between a pension company and a pension scheme member under which the member hands over all or part of their pension fund to the pension company which agrees to pay out an income to the scheme member for the remainder of that person’s life. The annuity would normally be paid monthly, quarterly, half-yearly or annually.
The amount of the annuity may stay the same throughout the years of payment or may have automatic annual increases built in. These increases may be at a fixed rate, e.g. 3% per year, or the rate of increase may vary, e.g. with the annual change in the Retail Price Index.
The annuity can be set up so that all or part of it reverts to your spouse or partner in the event of your death. Also they can be set up so that they are payable for a minimum period, say 5 or 10 years, even if you die before that period ends.
The value of the annuity is dependent on two factors – the size of the pot and the annuity rate offered by the pension company selling the annuity. The annuity rate is basically the factor used to convert the accumulated fund into pension.
Annuity rates are calculated by actuaries using various factors – mortality, interest rates, age, gender and sometimes health. In general terms, annuity rates are higher the older a person is because future life expectancy is less. In the same way men get higher annuity rates than women of the same age due to men having lower-life expectancy.
The annuity contract once purchased cannot be reversed.
Enhanced/Impaired Life Annuities
Enhanced annuities are designed for people with medical or lifestyle conditions that potentially reduce life expectancy. You may be able to get a higher rate of income if you are a smoker or have a medical condition. Some specialist annuity providers will pay you a higher income because they calculate that your income will be paid out for a shorter period of time.
If you can answer yes to any of the following questions you may well be able to obtain a higher income:
|Do you regularly smoke cigarettes? If you regularly smoke cigarettes and have done so for the last ten years please let us know as there is a good chance you will obtain a higher income when you set up your annuity.|
|Do you take regular medication?|
|Do you have high blood pressure and high cholesterol?|
|Do you suffer from diabetes?|
|Do you suffer from chronic asthma?|
|Do you suffer from or have you ever suffered a serious illness such as cancer, stroke, or multiple sclerosis?|
|Have you recently undergone major surgery?|
People suffering from very serious medical conditions may be eligible for an impaired life annuity. These conditions are likely to affect life expectancy considerably and can often involve an independent medical examination.