Pension annuities; what are they and how do UK pension annuity rates work. First, an annuity is a regular income, usually paid monthly, but it can be yearly or quarterly, paid in exchange for a lump sum payment, usually the result of years of investing hard earned money into an approved, tax-free pension plan. There are, as you would expect, different types of annuities, just to complicate matters. The vast majority of annuities purchased are conventional and pay retirees a risk-free income that is a guaranteed for life, i.e. until you die. Annuities are actually one of the oldest insurance policies around with their origins being traced right back to Roman times, when policies existed, known as annua, promised to pay income for a fixed period of time, or possibly for life.
Over 250,000 retirees buy an annuity each year in order to secure an income from their pension fund. An annuity is basically a promise from an insurance company (annuity provider) to pay you a regular income for the rest of your life no matter how long you might live. Insurance companies have to work out how long you will live statistically and how much annuity income to pay you each month. If they get the maths wrong and underestimate your life expectancy you will be the one who benefits but they will lose lots of cash. However, if they overestimate your life expectancy you will be the one who loses out and they will make huge profits. Overall, it no doubt balances out somehow.
Not surprisingly these insurance companies tend to err on the side of caution so no wonder some people think annuities aren’t really good value for money. The annuity market place is actually very competitive with insurance companies competing with each other to offer the highest UK pension annuity rates in order to persuade you to invest your pension fund with them. Unforunately, insufficient people know that they can increase their annuity income simply by shopping around for the best annuity rates on the open market utilising what is known as the open market option (OMO), and shopping around can really boost your retirement income.