Annuities
An Annuity is an income for life! Essentially, you hand over
a lump sum, say £100,000 and somebody else, usually a life
insurance company will guarantee you an income until your death.
So, an annuity is like the reverse of a mortgage. Instead of
getting lump sum and then paying back monthly amounts to your
home lender, you hand over a lump sum and receive monthly
payments until you die.
The rate of income you receive from the annuity will
depend on how much capital you and over and how old you are. A
healthy 65 year old man will receive a smaller income than a 70
year old man, because the 70 year old is not expected to live as
long! Because women tend to live longer than men, life insurance
companies tend to offer them lower annuity rates.
The
life insurance company selling you the annuity will be able to
offer you higher yields than you will be able to get by
investing in a fixed interest stock, like a gilt. The reason is
that when you take out an annuity, you are taking a statistical
gamble on how long you're going to live. If you buy a 'non
guaranteed' standard annuity, you could hand over £100,000 one
day and die a week later, allowing the life company to 'scoop
the board'. On the other hand, after handing over your cash, you
may live 40 years, thereby confounding the life insurance
company's experts who reckoned your life expectancy would only
to 20 years ! In addition to life annuities which stop paying
out on death, some known as 'guaranteed annuities' pay out for a
fixed term, regardless of when you die. Because the life
insurance company knows with certainty for how long it will have
to pay out, the level of payment is often lower than it would be
on a non-guaranteed annuity payment.
There are other
types of annuities, for example joint life annuities where the
capital is handed over to the life insurance company which then
pays an income for the life of both spouses.
Annuity
rates vary and are influenced by the prevailing level of
interest rates in the economy.
It will only take a few minutes of your time today but
could save you thousands of pounds in interest payments and will
eliminate any worries you may have about getting the best mortgage deal
possible.
