Tag Archives: Different Types of Annuities

Get the lowdown on the Two Types of Annuities

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An annuity is one of the most popular ways to optimise financial savings and use them to provide a regular income during retirement. Annuities are sold by insurance companies that offer this regular income in exchange for a lump sum – usually from the pension pot. There are many different types of annuities available on the market – but the two main types of annuities are fixed lifetime annuities (also known as level annuities), and variable annuities.

Fixed Annuities

Fixed lifetime annuities – fixed annuities are annuities where the income you receive remains fixed for the rest of your life – or until a predetermined period of time. You receive the income at fixed intervals, either monthly, quarterly, every six months, or yearly. The income you get from a fixed annuity depends on various factors such as the size of your pension pot, current annuity rates, your health and lifestyle, gender, and even your address. This is the most popular types of Annuities.

All these factors help the insurance company work out how much they can afford to pay you as a fixed regular income. You can also add extra features to a fixed annuity such as joint life option – where the income continues to be paid to the surviving partner, or early death guarantee, where the annuity payments continue for a fixed period even if you die during that period.

Fixed annuities can offer the security of a fixed regular income throughout your life. However, they do not offer protection against rising inflation or increasing spending, nor do they benefit from any upward movement in the financial markets in the future. There are different types of annuities that can offer a variable income during retirement.

Variable Annuities

There are different types of annuities that offer variable income during retirement. Variable annuities provide a change in income over the course of the annuity – and this may be due to different factors, depending on the type of variable annuity.

Inflation or RPI linked annuities are linked to the rates of inflation. High levels of inflation in the future will mean that you receive more income and thus have more spending power. On the other hand, fixed annuities offer a fixed income throughout the term of the annuity, so your income could lose its value over time if inflation continues to rise – which it always will.

Some other types of annuities that offer variable income include percentage increasing annuity – where the income increases at regular intervals at a fixed percentage, which is usually 3% or 5% per year. Both these as well as RPI linked annuities generally pay a lower income than fixed annuities in order to compensate for the future rises in income. You can also get annuities with an investment linked component. The investment component is linked to an external investment – so the income you receive will depend on the performance of that external investment and is not guaranteed.

Some other types of annuities include joint annuities where you can have your income paid to a partner after you are gone, and enhanced annuities, where the insurance company pays more based on a lower than average life expectancy. Enhanced annuities are available to those who meet certain health and lifestyle criteria such as regular smoking, health conditions like heart disease, obesity etc.

Fixed annuities have the advantage of providing a guaranteed, lifelong secured income. Variable annuities may offer a variable income which can help combat rising inflation, rising future expenses etc. However, variable annuities will generally pay less than its fixed counterpart in the initial stages. There are many different types of annuities available in the market and the key to finding an annuity or annuities that suit your needs is to shop around, understand each product and then make an informed choice.

Different Types of Annuities

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There are a number of different kinds of annuities and in order to get the most out of your choice of product it is important that you know what kinds of annuities are available and how they can benefit you. Firstly, there are annuities which are called Capital Protected Annuities and help provide annuitants with peace of mind. With this kind of annuity if you pass away before you reach 75, the fund that you have built up will be given back to your estate, excluding of course the income that has previously been utilised and a tax of 35%.

There are also impaired and enhanced annuities. A normal annuity is calculated to accommodate a life expectancy that does not reach beyond the average, so if you have an illness or condition that would decrease your life expectancy you can apply for an enhanced annuity or an impaired annuity. About a third of people reaching retirement have the potential to get an enhanced or impaired annuity. These annuities will give you extra income, so it is an excellent thing to apply for. Typically those who are smokers, overweight or have a history of cancer or heart disease are likely to get annuities of this kind.

Annuities which are called investment linked are annuities which are linked to the stock market. With this kind of annuity you can get the basic benefits of an annuity plus the potential of stock market development and what this could mean for your income. However, due to its link with the stock market there is no guarantee that an investment linked annuity will increase your income or improve it in any way.

With-profits annuities level out your investment over a period of time, this means that when you take out an annuity like this you choose an ABR or Anticipated Bonus Rate. If your anticipated bonus rate is lower than the insurance company’s then your income rises, but the opposite is also true.

There are a number of other kinds of annuities all offering a varying balance between your investment and your returns. With each option there is a risk and a reward and it will be up to you to decide which option best suits your lifestyle and the life you want to keep living. Annuities are a gamble, but a much less risky gamble than other investments that are available, and with all the options to choose from you can tailor your annuity to benefit you.