An annuity converts a lump sum (usually from a pension fund) into retirement income.
In order to understand how annuities work, consider what would happen if there were no annuities.
If you wanted an income from your pension fund when your retire, you would have to make regular withdrawals. However this would create two problems.
- How much income?
- If you draw too little income you would die without having spent all your money, but you would leave money to pass on to your family.
- Yet, if you draw too much you would run out of money and have to rely on your savings or fall back on your family or the State.
- Where to invest?
- If you invest too cautiously your income will be lower, but safer
- if you invest in a more risky way, you might obtain more income if your investments perform well.
Annuities efficiently convert capital into income by providing a high level of guaranteed income for life with no risk. This is achieved by investing in fixed interest investments and applying whats called a mortality cross subsidy.
For more information, contact Ablestoke