When it comes to pensions, there are plenty of technical words that can feel confusing. One of the most common is “annuity”. You may have seen it mentioned in pension paperwork or in the news, but what does it actually mean?
An annuity is a type of financial product you can buy with some or all of your pension savings when you retire. In exchange, the annuity provider pays you a guaranteed income for a set period of time, or even for the rest of your life.
There are various types of annuity available. For example:
Lifetime annuities pay you an income until you pass away.
Fixed-term annuities provide an income for a set number of years.
Joint annuities continue paying an income to your partner after you die.
The amount of income you receive depends on several factors, such as how much of your pension savings you use to buy the annuity, your age, and market rates at the time.
Annuities have been around for decades and used to be the main way many people accessed their pension savings. While today there are more options available, annuities are still an important part of the conversation around retirement, especially because they can provide peace of mind through a guaranteed income.
It is important to note that Pension App does not transfer annuities or defined benefit pensions. The reason is that these types of pensions work differently from defined contribution pensions. With defined benefit pensions in particular, transferring out could mean losing valuable guaranteed income benefits.
What we do instead is help you track, find, and combine your defined contribution pensions in one place. This gives you a clearer view of your savings, so that when you reach the point of considering your retirement options, you will have the information you need at your fingertips.
An annuity is simply a way of turning pension savings into a regular income. While not everyone will choose this option, it remains an important concept in the pensions world. Understanding the basics makes it easier to navigate the choices you may come across in the future.
With pensions, your capital is at risk.