An annuity can be simply defined as an insurance policy that pays a regular income in return for a lump sum. The insurance policy part is important, because the annuity will continue to be paid as long as you are alive.
You can think of the annuity business model as being very similar to the insurance business model. In the insurance business model everybody pays in so that the small group of people who have an accident are covered.
In the annuity business model, everybody pays in so that they each can receive a fixed monthly sum ad infinitum until they die. Some will die younger than others, but on the whole people will die at an average and it is this calculation that enables the insurance company to calculate how much it is able to pay you per year in return for your lump sum of cash.
Note that you don’t have to take out an annuity with the company you have your pension plan with. You may choose to look for a pensions annuity calculator from Age Partnership, for example, or a similar provider.
By switching to a new provider you could potentially boost your pension by hundreds each and every month.
Note that there are different types of annuities on the market, but that the vast majority offer a monthly income free of risk that is guaranteed for the rest of your life. This is the real benefit of annuities – that they are the only product of their type that offer absolute and complete security for the rest of your life.
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