Annuities

The basics

An annuity (or secured income) is the technical term for what most people think of as their 'pension', in other words the regular amounts of money paid to you in your retirement. It's the only retirement plan that will guarantee to pay you the same income for the rest of your life, no matter how long you live.

An annuity aims to replace your salary once you're retired. Usually the earliest you can buy one is when you're age 50 and the latest is by your 75th birthday. Traditionally you buy one using the money you've saved up in your pension while you were working, after you've taken any tax-free cash you're entitled to. You pay an insurance company, like AEGON Scottish Equitable, a lump sum in exchange for a regular income for life.

You can set up an annuity on a single life or joint life basis. Single life means we pay an income to you as long as you live. In a joint life plan we pay you an income as long as you live and after that an income to a member of your family. You can also add in options to protect your income against the effects of inflation.

There are two main sorts of annuity:

• pension annuities, which you have to buy with money from a pension fund
• purchased life annuities, which you can buy with non-pension money, for example using the proceeds from an ISA

Pension annuities are more common, with around 80% of people buying one at retirement. There are two categories of pension annuities:

 

Conventional annuities	Specialist annuities
You buy these with your pension fund and they provide you a guaranteed income. You also use your pension fund to buy these and they can include: enhanced annuities. These are still guaranteed and may pay you a higher income if you aren't in full health. investment-linked annuities These aren't guaranteed as your income can increase or decrease depending on the performance of the fund(s) you choose to invest in.	You buy these with your pension fund and they provide you a guaranteed income.