This article explains in layman’s terms what annuities are, how they work, and what they are used for. It uses a case study to show how annuities can be used to supplement pension income to cover expenses.
The term ‘Annuity’ is often mentioned in the financial press, but what actually are annuities and how do they work in practice?
The word annuity itself originates from the meaning ‘annual’ and can by definition, be described as ‘a yearly allowance’. To explain them in plain English is as a ‘really long term deposit, one where it is known exactly what the interest rate will be all the way along and when the payments will stop’.
Although many people may immediately think an annuity is locked away forever, that’s not always necessarily true. Like a term deposit an annuity can actually be cashed in before the term expires (even the lifetime ones in some cases). This may not always be the best course of action but don’t immediately disregard annuities if this is your main concern.
So, why have an annuity within a portfolio? If you have read this far, stay with us as they do make a lot of sense when used appropriately.
To download and use this content, make sure you're logged in then hit the Download button and choose 'Save as' to keep the document.