What is an annuity?
There are two main types of retirement income streams: allocated pensions and annuities.
An annuity is a type of investment provided by a life insurance company. You ‘buy’ an annuity with an up-front lump sum, which you provide from part or all of your super savings. The annuity then gives you set income payments over a specified period.
Payments are guaranteed for the life of the annuity, irrespective of what investment markets are doing. Annuities therefore provide greater certainty and security for your capital, but at the same time, your savings won’t grow if investment markets are performing well, as they would with an allocated pension account.
There are two types of annuity:
- Lifetime annuities, which pay you an income until you die.
- Term certain annuities, which last for a set time, after which they may return some or all of the up-front cost.
Once you have invested in an annuity, the payments you’ll receive are fixed and you may not be able to make lump sum withdrawals.