How Does An Annuity Work?

One thing we should know before buying an annuity is that once we’ve bought it, we can’t cancel it.

So, we have to get it right since the first time we buy it. After considering our decision, discuss our current outgoings and level of income we need with a financial adviser. So, how does an annuity work?

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Who Needs To Buy An Annuity?

If we have big monthly income and want to convert it into an income, we are able to buy an annuity.

Most people choose annuities for the first time when they are coming up to their retirement and need to buy annuity using part of their pension fund into an income.

If we are an employer of the final salary scheme, our pension is usually paid directly from the system so we don’t have to think about getting an annuity.

Single Or Joint Life Annuity?

The next path for us to buy annuity is that we should decide what kind of annuity we will buy either single or joint life annuity.

A single annuity pays us an income for the rest of our life, but the joint life annuity pays our partner as well.

If we buy joint life annuity and one of us die first, the other partner is left short of money. Our partner will still get paid some or all of the annuity income.

But, our partner still has to pay the joint life annuity with the lower rates. The higher our annuities proportion income, the lower initial income which will be paid.

When our partner is younger than us, the lower annuity rate will be offered to us as our partner is expected to pay the joint life annuity longer.

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Annuity Guarantees

When an annuity has a guarantee period, it will be paid for a set time period which is agreed before, usually five or ten years.

And it will be paid out even if we die during that time. But if we die during the annuity’s guarantee period, the payments may be paid out to our survivor as the remainder of the annuity period.

But sometimes, it can also be summed up into big amount of money and be paid out to our survivor in one occasion. An annuity with a guarantee is different from joint life annuity.

An annuity with the guarantee is only has ten years period as the maximum. So, it won’t fully protect our partner in the long-term.