An annuity is purchased by the annuitant, either by:

• making regular instalments which are invested (known as a regular payment annuity) or,
• With a lump sum (known as a single payment annuity).

Annuities can be bought with savings or with a pension fund. Annuities are commonly used for retirement plans, as part of a retirement pension. There is usually a minimum fund size required to buy an annuity. In very basic terms, an annuity is calculated by taking the amount of money you have invested (plus the interest) and dividing it by the number of years you are expected to live.

Although annuities are purchased through a life insurance company, unlike life insurance cover, an annuity does not require a physical examination and, instead of just paying out on death, the annuity is used to provide an income to the annuitant while they are still alive.

An annuity that pays you an income for the rest of your life is called a life time or life annuity. In exchange for your pension fund (or other savings) the annuity company promises to pay you a regular income, which can be paid monthly, quarterly, half-yearly or annually, this income is taxable.

When an annuity is purchased, the annuitant signs a contract which details the exact terms of the annuity, including the length of time that it covers, i.e. for the life of the annuitant or for a fixed number of years.

A life annuity is a form of longevity insurance. When the annuitant dies or the fixed term ends the contract terminates and any remaining funds are forfeited, unless there are other annuitants or beneficiaries named in the contract.

From April 2011, the UK Government will end the rule that means you have to buy an annuity with your pension savings when you reach the age of 75.

As a result of the Emergency Budget in June 2010, the UK government is phasing out the compulsory age limit for buying an annuity with your pension fund and introducing measures for people turning 75 before April 2011, who haven’t yet bought an annuity.

Because annuity policies and contracts are complicated it is always advisable to take independent financial advice or use the services of a qualified annuities adviser before purchasing an annuity. This booklet explains the different types of annuity policy available, to help you make more informed decisions in consultation with your adviser.