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Looking
for advice on Pension Annuities
An annuity is a contract between an insurance company and a
pension scheme member under which the member hands over all or
part of their pension fund to the insurance company which agrees
to pay out an income to the scheme member for the remainder of
that person's life. The annuity would normally be paid monthly,
quarterly, half-yearly or annually.
The amount of the annuity may stay the same throughout the years
of payment or may have automatic annual increases built in. These
increases may be at a fixed rate, e.g. 3% per year, or the rate
of increase may vary, e.g. with the annual change in the Retail
Price Index.
The annuity can be set up so that all or part of it reverts to
your spouse or partner in the event of your death. Also they
can be set up so that they are payable for a minimum period,
say 5 or 10 years, even if you die before that period ends.
The value of the annuity is dependent on two factors – the
size of the pot and the annuity rate offered by the insurance
company selling the annuity. The annuity rate is basically the
factor used to convert the accumulated fund into pension.
Annuity rates are calculated by actuaries using various factors – mortality,
interest rates, age, gender and sometimes health. In general
terms, annuity rates are higher the older a person is because
future life expectancy is less. In the same way men get higher
annuity rates than women of the same age due to men having lower-life
expectancy.
The annuity contract once purchased cannot be reversed.
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