What is a Pension Annuity and how does it work?

Learn about pension annuities and benefit from them when it comes to retirement planning

11:12 21 February 2013

Once you retire or once you stopped working, you need a steady source of income in order to sustain or improve your current lifestyle. You can make this happen if you can make regular income for the rest of your life without actually working. This is possible with pension annuities. 

Here’s how pension annuity works; a retiree will buy annuity from the insurer. The latter will convert the lump sum into a regular secure income. The insurer puts the money in an investment with fixed interest and no risk for the retiree. The lump sum that was invested will be divided by the number of years that the retiree is expected to live. 

 

The amount of the income will be determined by several factors including the life expectancy of the retiree and their gender, age, health, and interest rates. 

 

There are different annuity options for retirees that you can choose from to address specific needs and demands. 

 

There’s the joint annuity, which can be transferred to the retiree’s spouse of dependents in case of death.

 

There’s also level annuity in which the retiree receives the same amount throughout the duration of the retirement. 

 

Retirees are highly encouraged to study their options before they get annuity as these cannot be changed after the purchase has been made.