Immediate annuity
The annuity is a popular life insurance product taken up by many people in the UK. When an annuity is purchased using a lump sum such as a pension fund it offers a guaranteed income to the annuity policyholder for the remainder of their life. The income is based on the amount of money spent on the annuity and also the annuity rate at the time. Some types of annuity policy also offer an immediate lump sum payment - ideal when you are looking for an immediate route for accessing funds tied up in a pension.
Two basic types of annuity can be purchased - a compulsory purchase annuity and a purchased life annuity. The compulsory purchase annuity requires the purchaser to commit to buying their annuity through their pension scheme, currently before the age of 75. In 2006, as part of 'A-day', the government is abolishing the age limit on compulsory purchase annuity schemes.
The other option, a purchased life annuity, is taxed at a lower rate than a compulsory annuity, but is purchased with funds other than a pension. As the majority of people who buy into annuity schemes do so with their pension, the compulsory purchase option is the most used of these annuity types.
Compulsory purchase annuities
There are several types of compulsory purchase annuity schemes available, which include annuity certain, escalating annuity, deferred annuity and joint life annuity schemes. Each scheme has its own benefits and drawbacks, as does one of the most popular annuity schemes available - the immediate annuity scheme.
The idea behind the immediate annuity is that as soon as the immediate annuity is purchased, immediate pay outs from the annuity commence. This means that an immediate annuity will begin paying funds out at the agreed annuity rate within a month of the lump sum being paid.
The advantages of an immediate annuity scheme are clear. Immediate access to a pension fund is guaranteed releasing funds without having to wait around for the annuity pay out after a period of time. Additionally, some immediate annuities provide the annuity policyholder with the ability to receive an immediate tax-free lump sum back from their investment.
Guaranteed income
Immediate annuities are most popularly purchased through a standard 'guaranteed' pension annuity scheme, where income is guaranteed for the remainder of the annuity policyholder's life. Ninety-percent of annuity policyholders choose a guaranteed annuity product as it offers security and peace of mind. With-profits annuities and unit-linked annuities are slightly more risky as they are linked to the performance of the stock market and the underlying assets.