An annuity is a policy that converts your pension pot into a series of regular income payments for the rest of your life no matter how long you live.
When you purchase an annuity the insurance company invests your money in very safe assets and pays you a regular income every month (other frequencies are available) for the rest of your life. If you select a joint annuity, and you die before your spouse or partner, the income will continue to them for rest of their life.
The amount of income payable from an annuity depends on a number of factors including:
Enhanced Annuity - You might be able to get a higher annuity income if you smoke, are taking prescription medication or have recently had medical treatment for a condition. You may qualify for an enhanced annuity which may result in a higher income.
Most annuities pay a guaranteed income for life and have the following characteristics:
In order to meet the income for life promise, annuities are based on the concept of mortality cross subsidy.
Mortality cross subsidy is unique to annuities and clearly favours those in good health who may live longer than expected at the expense of those who die early. To overcome this problem some insurance companies provided enhanced annuities. Enhanced annuities pay a higher income for those who have a medical condition that may reduce their normal life expectancy.