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What is an Annuity and How to Choose One

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If you want to be sure of an income for the rest of your life then one option is an annuity. This is a financial product sold by an insurance agent, and it has become a popular way for people to prepare for their future following retirement. There are many options when it comes to this type of investment so it makes sense to find out as much as you can before committing yourself to anything.

What is an Annuity?

When you choose an annuity you are given a guaranteed income for the rest of your life, but in return for this you either need to invest a lump sum or hand over your pension. One way to look at it is that you are giving the insurance company a loan, and in return they are giving you regular payments that could easily work out to be a lot more than what you lent/gave them originally. The fact that the annuity will keep providing you with regular money right up until you death makes it an attractive proposition. The other nice thing about this type of financial package is that you are not required to choose this option right away after retirement.

In the UK you are expected to arrange an annuity before the age of 75. Before this time you can just get withdrawals from the standard pension fund – this is referred to as an unsecured pension. After the age of 75 though, you need to arrange a secure pension in the form of an annuity. This requirement to have an annuity by 75 is a much debated topic and it could be that the law will change in this regard.

The annuity is a strange financial package because you can actually get larger payments if you have a serious illness or smoke a lot. This is because the insurance company believes that you won’t live as long as the average so they can afford to give you higher payments. There are many different types of annuity and the one to choose will very much depend on your personal circumstances. It is also usually possible to get an annuity whereby at least a partial payment will continue to be paid to your spouse after your death.

How to Choose an Annuity

The most important thing to say in regards to choosing an annuity is that you need to weight up your options. Don’t be tempted to just take the first package offered, because this is unlikely to be the best one. You will need to consider your requirements fully and make choices based on this. It is possible to get an annuity that will increase 5% every year; this ensures that you won’t be losing out because of inflation. Other annuities do not make any allowances for inflation and will only pay out a fixed rate for the rest of your life. This means that you could actually be getting less each year because of inflation.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.


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