What is an Annuity
You have been paying into your pension for years and now wish to retire. The big question you are asking yourself is ‘What do I do?’
At the point of retirement, your pension fund(s) will have accumulated a sum of money to allow you to obtain benefits. From this fund you will have the option to take a tax-free cash payment of usually 25% of the fund value. The remaining fund is then used to provide an income in retirement. This is known as an ANNUITY.
An annuity is a contract which provides a regular income for life from an insurance company in return for the investment of a capital sum, usually from one or more pension funds. This income is payable for the rest of your life no matter how long you live.
Once established you can be secure in the knowledge that your income is guaranteed for life, however, because the income is for life it is important to choose your annuity options carefully as once it is established normally you CANNOT change your mind.
Whether you choose to do nothing and take the income from your pension provider, or take the more sensible approach and shop around for the best rates and the most appropriate annuity for you, it is the annuity that will provide you with your income in retirement. The ability to shop around and find the most competitive income is known as exercising your ‘Open Market Option’.