What is an annuity?

What is an annuity?
An annuity is an investment in future income, an insurance plan where a person saves money with an insurance company which will then pay in future for the rest of their lives as a retirement plan.

This plan allows the individual to convert their retirement funds into a salary like a plan where it flows in controlled amounts, contributions, known as purchase payments are converted into regular payments that can last an individual their lifetime.

When is an annuity needed?

Some people find themselves in situations where they cannot qualify for normal life insurance like bad health or low-income. Annuity steps in to save such cases.

When one lacks trust in the existing stock market, they put their funds in an annuity which eliminates the worry that in that their finances remain secure.
One also chooses this kind of plan when they know their employment does not guarantee a secure future in terms of finances.

Individuals who lack family members or loved ones who will look after them in old age prefer this plan as compared to ending up in nursing homes.

How much does an annuity cost?

Annuity costs vary from one insurance company to another but insurance companies arrive at the rate using Annuity Payment (PV), a formula that determines periodic payment of an annuity. This way, the present value portion of the formula is the initial payout, many factors considered. These rates determine how much the investor will earn per year for every £10,000 paid.

This gets determined by an individual’s life expectancy, health, interest rates and government bonds.

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