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Financial Term Of The Week – Annuity

Posted on February 03rd, 2010 in Financial Terms Of The Week

Financial Term Of The Week – Annuity

The payment of a regular income by a life company to an annuitant either for
life or shorter periods in exchange for a lump sum. Annuities are typically used for pensions and the individual receiving the annuity is known as an annuitant. In the UK they can broadly be classified into two types:

– A compulsory purchase annuity, which is bought from the proceeds of a pension fund and is taxable as earned income.

– A purchased life annuity, which is bought with an individual’s own capital and taxed at a lower rate than a compulsory purchase annuity.

There are three different types of pension annuities, commonly referred to as
standard annuities, with-profits annuities and unit-linked annuities. Standard pension annuities are the most commonly purchased and account for over ninety per cent of the UK market. The income from a standard pension annuity is guaranteed for the rest of the annuitant’s life whereas the income from a with-profits or unitlinked annuity will fluctuate depending on the investment performance of the underlying assets.