What Really Is an Annuity?
When you approach retirement, you will be faced with many tasks that you will have to complete to help you achieve your financial goals. If you have saved into a defined contribution pension scheme within your working life, you will need to decide what you would like to do with the money you have saved to assist you in your retirement. Picking a suitable option and knowing what they mean is very important as making the wrong decision can cost you the retirement you always wanted.
This blog post will cover what an annuity is. It will give you a clear understanding of this retirement option and if the option is suitable for you.
What is an annuity
An annuity is a guaranteed income in retirement. You pay a lump sum to the annuity provider, and you will receive regular income payments from them for the rest of your life. This option is very comforting to people because no matter what, you know you will have enough money to get by. For example, If you live for a long time or there is a noteworthy recession, you will still receive your payment.
Whether an annuity is good value can be challenging to work out. It will depend on how long you are expected to live in retirement, and the actual value to you is that the annuity provider guarantees the payment.
How does an annuity work?
An annuity is in place to provide a steady income and prevent the fear of running out of money. There are different types of annuity and diverse options available to suit your particular needs.
A lifetime annuity is the most well-known. This is when you pay a lump and get a guaranteed income for life. There are many options within these products. For example, the ability to increase your payments in line with inflation and allow some of the annuity to be paid to your loved ones if you pass away.
Another common type is a fixed-term annuity. Instead of for life, this product will pay out an agreed income for a limited time, say 5, 10 or 15 years. This will allow you to lock in the income you need over this period without committing all your capital.
As a financial adviser with years of experience in the financial sector, I can help you get the best annuity rate by researching the market and making recommendations based on your goals and circumstances.
Advantages of an annuity
The advantages of annuity, in a nutshell, are that your income is guaranteed no matter what happens to the markets, and if you live longer than your life expectancy, you will have an income for life. Another advantage is that you can choose your options so your income can keep up with inflation. Furthermore, your income can continue after you die if you select specific options when applying for the annuity.
How do I know an annuity is right for me?
There are also downsides to an annuity. For example, in recent years, they have not offered a very large income in exchange for a large lump sum of cash. They are also irreversible, so you cannot change your mind later. The other major downside is that the money you have paid is no longer part of your estate to be passed on to your loved ones.
Some experts believe that the ideal solution might be to get an annuity to cover your essential bills but to leave the rest of your retirement pot to invest and use more flexibly.