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In this article we look at what Annuities are, how an annuity works and the different types of annuities available on the market today. An annuity provides an income or pension in old age. This article gives out a clear and vivid introduction to annuities.

What are Annuities?

If in case you have a money purchase pension scheme, you can make use of the cash you have saved to buy an annuity. This will effectively “unlock” the money that you have saved in your pension fund to give an income in your time of retirement. The amount you get will depend on your age, sex and medical history – and the present annuity rate.

The problem that faces retiring people now is the poorer annuity rate that is on offer. The rate is crucial because it identifies how much income a person will get for the rest of their lives.

So, what determines annuity rates?

Annuity providers invest greatly in extra safe government stock and the rates of return available from this type of investment is closely linked to the Bank of England base interest rate. The Bank of England in the United Kingdom has a base rate that is currently at a very low level. This means that the return on government stock is low and poor and annuity rates that are offered to many people w ho are retiring now are considered even lower than they have been.

Are there any other options for better annuities?

In the present annuity rate climate, many people are in the verge of revising their retirement plans. When a person’s retirement age is reached, the manager of the pension scheme will write an outline of the annuity rate that they currently offer. However, members of the pension scheme have the right to shop and look around for the best annuity rate, under an “open market” option; here, you can often get a better deal by doing so.

Members of stakeholder schemes or personal pension can also normally take up to 25% of their fund tax-free. Also, if you are a member of a personal pension group or a stakeholder plan group, you can take up to 25% of your fund tax-free. When you get your tax-free lump sum you commonly have to buy an annuity with the rest of your fund.

Can you ignore annuities?

Yes. Since April 06, 2006, pension savers have been able to disregard or ignore the option to buy an annuity altogether. In fact, people can now draw down direct from their pension fund and leaving their pension cash invested. However, any amount of money that is left in their pension fund on death could be liable to an Inheritance Tax or IHT charge.

So those are some of the important thing you need to know about what annuities are. Please find further articles in our savings & investments section for additional information on annuities.