The payment of a regular income by a life company to an annuitant in exchange for a lump sum either for life or shorter periods.
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:
1. A Compulsory purchase annuity which is bought from the proceeds of a pension fund and is taxable as earned income
2. A purchased life annuity which is bought with an individual's own capital and is 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 percent 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 unit-linked annuity will fluctuate depending on the investment performance of the underlying assets. There are various options which can be provided including:
* Annuity certain: Income is paid for a given period whether or not death of the individual occurs
* Deferred annuity: Income which does not commence until some future specified date
* Escalating annuity: Income which increases annually by a given amount, for example 3%. The choosing of this option results in lower income compared with a level annuity over the initial years
* Immediate annuity: An annuity which starts to pay income soon after it has come into operation, for example at the end of the month following the payment of the lump sum
* Joint life annuity: Income usually relevant to two people (for example man and wife) which continues until the death of the first person only
* Joint life and survivor annuity: Income usually relevant to two people (for example man and wife) which continues until the death of the second person* Level annuity: Income which is paid at a fixed rate throughout the life of the individual.
See also guaranteed minimum period
* Temporary annuity: Income is paid either for a fixed period or until earlier death.