What is an Annuity?

What exactly is an annuity?
Financial Advice for Retirement Planning: A regular income paid until the death of you or a dependant (wife, husband) bought with a fund of money (normally a pension fund).
What criteria do annuity providers rely on to determine how much they will pay you?
Financial Advice for Retirement Planning: How much money you have and how long you or your dependant included in the annuity are likely to live – that is receive the income.
Why is it important to shop around for an annuity?
Financial Advice for Retirement Planning: Everyone has the right to shop around. This is called the Open Market Option. Exercising that option may lead you to find that you are already with the top company but annuity rates vary from time to time and are based on your age, health, etc. Even a healthy person can increase their annuity income by a quarter or more if their existing pension company has low annuity rates. If you, or your dependant, smoke or are in poor health the increase can be substantially greater than this.
What different types of annuity are there?
Financial Advice for Retirement Planning: Guaranteed annuity; where either a level or increasing income is fixed at the outset.
Investment-linked annuity; where the income can go up or down (normally within limits) dependent upon the underlying investment.
Enhanced or impaired life annuity; if either the annuitant or his/her dependant is in poor health or smokes, etc, rates can be higher. This can be on a joint life or single life basis. Joint life pays a fixed percentage of the annuity to the dependant which is fixed at the outset. The annuity can be paid for a guaranteed period of up to 10 years, regardless of the death of the annuitant.
What are the risks involved in purchasing an annuity?
Financial Advice for Retirement Planning: That the annuitant dies earlier than the insurance company expects. Poor investment performance with investment linked annuities can lead to falling income. Significant increases in interest rates in the future could mean that you would be better off to have delayed purchasing the annuity. To delay can result in lower income due to annuity rates having fallen (much the most common occurrence).
Do annuities cover increased expenses such as nursing care?
Financial Advice for Retirement Planning: Pension annuities do not change in order to cover increased expenses such as nursing care using non pension capital. A specific type of annuity called an Immediate Care Annuity can be purchased to cover such costs.
Can you pass your annuity on to your estate if you die?
Financial Advice for Retirement Planning: Pension annuity income can pass to the estate during the guarantee period if the annuitant dies prior to the end of such a period. Otherwise no residual value is available to the estate. With non-pension annuities such as those covering nursing care, you can buy guarantees which effectively do rebate a set proportion of the capital if the annuitant has not received the benefit and these guarantee amounts do become part of your estate.
Will my partner be covered by my annuity?
Financial Advice for Retirement Planning: Your partner will be covered by an annuity only if you set it up on a joint life basis at outset. This can provide either the same amount of income as you or a specified amount or percentage.
Are pensions the best way to save for retirement?
Financial Advice for Retirement Planning: Pension savings have the highest tax breaks of any savings product. They are however designed for the purpose of providing pension income and are relatively inflexible, particularly as a source of capital to pass to the next generation.
If the fund you accumulate in a pension is planned to provide you and your dependants with the core income that you will need in retirement then there is no better way to accumulate a fund for this purpose.
However, you have to ensure that just because it is tax efficient you do not end up with an imbalance in your savings and too high a proportion of your assets in pension. However, given current levels of pension savings, this is a very rare problem