Annuities explained, the guaranteed annuity.
A conventional annuity is a contract whereby the insurance company agrees to pay to the investor a guaranteed income either for a specific period or for the rest of his or her life in return for a capital sum.
With a guaranteed annuity, income is paid for the annuitant’s life, but in the event of early death within a guaranteed period, the income is paid for the balance of the guaranteed
annuity period to the beneficiaries.
The capital is non-returnable and hence the
income paid is relatively high.
Annuity key points.
Income paid is based on the investor’s age, i.e. the mortality factor and interest rates on long term gilts.
Income is paid annually, half yearly, quarterly or monthly.
Annuities can be on one life or two. If they are on two lives the annuity will normally continue until the death of the second life.
If the annuitant dies early, some or all, of the capital is lost. Capital protected annuities return the balance of the capital on early death.
Payments from pension annuities are taxed as income.
Purchased life annuities have a capital and interest element – the capital element is tax free, the interest element is taxable.
Types of annuity.
Types of annuity include the following - Immediate; guaranteed; compulsory purchase; open market option; deferred; temporary; level; increasing or escalating.
annuity types explained >>
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