What is an Annuity - Explanation of annuities and basic options at retirement
"Hi there, today’s subject annuities, what’s an annuity, everybody talks about them, nobody really knows what they are. So simple explanation for you, when you get to retirement you’ll have built up retirement age you’ll have built up a pension fund and that pension fund is then invested with an insurance company and they agree to pay you a monthly income for the rest of your life and that’s what an annuity is.
It is a monthly income or an annual income if you choose to for the rest of your life hence annuity annual income. So there are different types of annuity, but the decisions that you’ll need to make when you come to retirement are about what sort of annuity you would like and probably the only way for me to explain that is to think of it like when you buy a car.
When you buy a car you have a basic model, if you then want to have extras, you want that CD interchange player, you want movies in the back seats or you want sports wheels or you want a bigger engine or a sun roof or a big spoiler on the back of your car or something like that. All of those extras cost money so the more flashy car that you have, the more expensive it becomes and that’s exactly the same with your pension, with your annuity in retirement.
If you want to add bolt ons to your pension such as you would like to build in a spouses benefit for your partner, or if you want a guaranteed income rate for a number of years, or if you want to have inflation built into your pension income or if you want to have fixed pay rises into your pensions, all of these different bolt ons they all cost, so what happens is because that annuity then becomes more expensive, your income starts at a lower level.
So basically you start with your basic income, your basic annuity at a high level and then every time you add a bolt on be it a sunroof, be it a spouses pension, be it sports wheels, or an inflation linked pension it becomes more expensive so the starting point for your annuity income is a lot lower than if you went for the basic pension model. So that’s what an annuity is and those are the sort of options and choices you’ll have when you come to retirement age. Thanks for watching."