Fixed annuities guarantee a set payout each month. With variable annuities, payments fluctuate depending on the performance of the annuity-holder’s investments. Fixed annuities are safer, but the payment doesn’t typically rise with inflation. Variable annuities allow the potential for a higher payout, but also carry the risk of a lower payout. Annuities are most suited to those who have retired. Annuities are not usually recommended for people who are still in full-time employment or likely to go back to full-time employment.

An annuity can be compulsory purchase or purchased life

Compulsory purchase

These are bought with money from a pension fund. Part of the pension fund is paid out as tax-free cash, but the remainder MUST be used to purchase an annuity.

Purchased life

Purchased life annuities can be bought using your own money. Part of the income you receive will be tax-free.

You are free to purchase your annuity from any provider – you do not have to buy it from the company you built up your pension fund with. There is a lot of choice regarding the type of annuity you can buy and the additional protection you can take out. Possible variations include single or joint life, level or escalating, guaranteed or not and enhanced or impaired life. It is therefore important that you understand all the choices available – it might be worth consulting an Independent Financial Adviser to explore your options.

If you are considering purchasing an annuity, it is worth shopping around to find the most suitable annuity for your individual circumstances. The finance sections of the national newspapers often list the best deals for different types of customers. The FSA also provide comparative tables which may help you to find the best product for you, information on annuities can be viewed here.

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