If you are approaching retirement age then you will have come across this thing called an annuity. Even if you are starting a job for the first time, and making your first payment to a pension you may have heard the word annuity. But what is annuity? An annuity is a way for you to take care of yourself financially once you retire. For some this may seem like a faraway thought, but for others it is right around the corner. No matter your age, what is annuity is a good question to be asking.
During your working life you have been saving a pension, either just with your employer or perhaps you also have a private pension fund. In either case, when you retire you will need to find a way to make that money last for the rest of your life. You, however, have no idea how long that might be and budgeting for a lifetime can be extremely difficult. Not to mention that living expenses are increasing every year, and the money you have saved simply won’t go as far as you would like.
This is where knowing what is annuity, can come in handy. With an annuity you will exchange the money you have saved through your pension for an annuity and this annuity will guarantee you an income for the rest of your life. Annuity providers use the average life expectancy to calculate how long one might live and how much money they will need over that time. This is of course only an estimate, but when you come to look into what is annuity, you will come across annuity calculators. This calculator will ask you to input your gender, age and any medical conditions and with this information it will offer a possible annuity rate.
That rate will be the rate of return that you will receive from your investment. When you give the insurance company your pension, they use the money to buy government bonds and gilts and it is the return from this investment that gives you your regular income. There are many different options to consider if you decide to take out an annuity. But the first step in understanding those options is understanding what is annuity. It is not complicated, but there is a lot of information available so it can be a bit overwhelming.