An annuity is a contract to pay a set amount each year (although payments can be made monthly) while the annuitant (the life on whom the policy depends) is still alive. The amount to be paid is usually described as the annual amount irrespective of the payment frequency.
Payments can be made in advance (at the beginning of the payment period) or in arrears (at the end of the payment period).
The payment can be made with or without proportionment. Proportionment means part of the frequency payment term period. So if a person dies part way through a payment period then with proportionment the part period would be paid, whereas without proportionment the part period would not be paid as only full periods are paid.
Most annuities are paid for by single premium called the consideration. However deferred annuities are often paid for by regular premiums.
Annuities are often used by retired persons to provide them with a regular income guaranteed to last a life time. Annuities are also provided by pension arrangements not covered by this paper.
Annuity rates are determined by gilt yields and life expectancy.
Immediate annuity.
An immediate annuity has a single premium, starts immediately and pays the payment until the annuitant dies.
Deferred annuity.
The payments under this contract are deferred until a future date. The date of the contract is called the vesting date and the date on which payments begin is called the maturity date. The difference between the two is the deferred period. With deferred annuities premiums are often paid in regular amounts during the deferred period. If the annuitant dies before the maturity date then the life office will usually repay the premium already paid without interest. Once the maturity date is reached then the annuity is paid until the death of the annuitant. At maturity date the policy may offer the option of the annuitant receiving a lump sum in cash in lieu of the annuity payments.
Many deferred annuities are effected in connection with pension schemes or personal pension contracts. In these cases full cash options will not be available.
Temporary annuity.
This is payable for a fixed period or until the death of the annuitant which ever is the shorter period. This annuity type is not dependent on the Age of the annuitant as there is a set period of payment.
Annuity certain.
This pays for a fixed period irrespective of whether or not the annuitant lives or dies.
Guaranteed annuity.
This annuity is guaranteed to be paid for a minimum period of time irrespective of whether or not the annuitant dies. During that guaranteed period. If the annuitant lives longer then the annuity continues to pay for the life time of the annuitant. If the annuitant dies within the guaranteed period then a commuted lump sum may be payable.