Annuity

An annuity is a financial product in which you pay a lump sum, or a series of payments, to an insurer in exchange for a stream of income. With a lifetime annuity, the insurer pays an agreed amount for as long as you live; this pools longevity risk across many people, since those who die early in effect subsidise those who live long. The income depends on your age, sometimes your health, interest rates at the time of purchase and the options chosen, such as income that rises with inflation, a guarantee period or a continuing payment to a spouse. In the US, the term also covers deferred and variable annuities used as savings products.

The main attraction is certainty: an annuity removes the risk of outliving your money and the need to manage investments. The trade-offs are that the decision is usually irreversible, the capital is gone if you die early unless you pay for protection, and a level annuity loses purchasing power to inflation, while an inflation-linked one starts at a much lower income. You also rely on the insurer staying solvent, although some countries protect annuity holders if an insurer fails, as the UK’s FSCS does. Many retirees combine an annuity covering essential spending with invested savings for flexibility. Annuities sold as savings products can carry high fees and complex terms.