Annuity glossary - explaining the jargon

There are five different kinds of annuities. Choosing the right one for you depends on where the money is coming from and what you need it to do.

• Pension Annuity: A lifetime income you can buy with money from pension pots. You choose from a range of options to suit your needs. And your choices will affect the amount of income you receive.
• Immediate Life Annuity: These are similar to pension annuities, but you buy them with money from savings.
• Immediate Needs Annuity: You can buy this annuity to help cover the costs of care. They have similar features available to other annuity products.
• Fixed Term Annuity:  You buy it with pension money to provide a guaranteed income for a fixed amount of time, and you could get a lump sum back at the end. This depends on how much your annuity cost, and how long you received payments from it.
• Enhanced Annuity: You might get more money from your annuity if you have certain medical conditions or a lifestyle that could affect your life expectancy.
• Open Market Option: This allows you to shop around and compare rates from different providers to see if another provider can offer you a better annuity rate or income option rather than taking the default one offered to you by your current pension provider.

Here are the options you have when picking what you want your annuity to do for you.

Types of Payment

• Tax-Free Cash Lump Sum: You can take up to 25% of your pension as cash without paying tax. Your money is paid directly into your bank account, so it doesn’t count towards your annuity
• Payment Frequency: How often you want to be paid. Most annuity products offer monthly, quarterly, half-yearly or yearly payments. You’ll also need to decide if you want your payments to start as soon as your annuity is set up (in advance) or if you want your first payment at the end of your chosen frequency (in arrears). 
  
• Level Annuity:  This is sometimes called a flat rate annuity. You will get the same amount of money every time you are paid until you die.
  
• Escalating Annuity:  Your annuity payments will increase each year either by a fixed percentage or in line with the Retail Price Index. You choose which one suits you best. 
  

You have options that you can add to your annuity which leave money to other people when you are gone.

• Guarantee Period: Your payments continue to your estate for a fixed time after you die. The guarantee period starts when your policy is set up. So, if you choose a five-year guarantee, and die two years into the policy, your annuity payments would carry on to your estate until the five years is up.
  
• Value Protection:  You can protect the amount you bought the annuity for, and a lump sum can be paid to you beneficiary or to your estate when you die. The lump sum is equal to the amount you bought the annuity for minus the payments made to you while you were alive. So, if you buy an annuity for £100,000 and die after receiving £70,000 worth of payments, we’d pay £30,000 to your chosen beneficiary.
  
• Single life Annuity: Your annuity will pay you until you die. We won’t make any further payments unless you’ve chosen additional covers such as a Guarantee period, or Value Protection.
  
•  Joint life Annuity: You can choose to pass your annuity payments on to your partner or dependant after you die. You will need to decide how much of the money they receive, which can be up to 100%. If you chose 100% for example you will still be paid until you die, and then your partner will receive the same level of payments for the rest of their life too.