Purchased life annuity Guide

Purchased life annuity
Also known as an immediate annuity, this type of contract provides, in return for a single premium, an annual payment starting immediately and continuing for the rest of the annuitant’s life.

Annuities can be on a single life or joint lives, most usually husband and wife. These policies are particularly popular for retired people who want a guaranteed income for as long as they live. They may be bought with the tax free cash available from a personal pension on retirement.

Where an annuity is being used to provide retirement income for a married couple, it would not be advisable to have a single life annuity, because if the annuitant died first, payments would cease and the surviving spouse would be left with nothing. This has led to joint life last survivor annuities. These contracts pay an annuity for the joint lifetimes of the two annuitants. Payments usually continue in full after the first death, but sometimes reduce by a set amount, say a third.

Temporary Annuity
Some annuities can be bought where the income is paid only for a fixed term, eg. For 5 or 10 years. These are most often used in conjunction with Single Premium Bonds and Endowment/ Unit Linked Savings Plans.

Most temporary annuities are designed to be payable for either a fixed period, or the annuitant’s lifetime, whichever is shorter. If the annuitant survives the fixed period, the annuity ceases, as it does if he dies during that period.

Deferred annuity
It is possible to establish a purchased life annuity to start paying out at a future date, this being known as a deferred annuity.

The period between the date of the contract and the date the annuity is to commence (often called the vesting date or the maturity date) is the deferred period. Regular sums would be put aside to fund the annuity, often during the deferred period.

If death occurs before the scheduled date for the start of the policy, the premiums are usually repaid, with or without interest. The annuity becomes payable once the vesting date is reached and will continue for the rest of the annuitant’s life.

Certain annuity
An annuity certain is a contract to pay an annuity for a specified period regardless of whether the annuitant survives. It does not depend on the age of the annuitant, as payment is guaranteed for the set period whatever happens.

Guaranteed annuity
For a slightly higher cost than a certain annuity, a guaranteed annuity can be bought. This pays an annuity (to the estate) for a minimum period even if the annuitant dies during that period. If the annuitant lives longer the payments continue.

Thus an annuity guaranteed for ten years will be payable for life or ten years, whichever is the longer. If the annuitant dies during the guaranteed period, then the balance of the guaranteed instalments will be payable to his estate, though a continued cash sum may be payable instead.

Capital protected annuity
For a slightly higher cost than a certain annuity, a guaranteed annuity can be bought. This pays an annuity (to the estate) for a minimum period even if the annuitant dies during that period. If the annuitant lives longer the payments continue.

Thus an annuity guaranteed for ten years will be payable for life or ten years, whichever is the longer. If the annuitant dies during the guaranteed period, then the balance of the guaranteed instalments will be payable to his estate, though a continued cash sum may be payable instead.