This page explains the meaning of some of the more common terms you may come across when learning about annuities.

Annuity
A contract with an insurance company whereby an income is provided in return for a capital sum paid to the provider.  Annuities can be for life, or for a predetermined period of time.

Annuitant
Person entitled to receive the annuity income.

Enhanced Annuity
People with ongoing health or lifestyle issues, such as heart problems, smoking or being overweight, can normally obtain higher annuity rates, because statistically they are likely to live for less time.

Escalation
Applies when annuity income payments increase at a predetermined rate, for example 3% per year.

Guarantee Period
This is the initial period of the contract for which the income is guaranteed to be paid regardless of whether the annuitant survives.  For example a 5-year guarantee period will ensure that annuity payments continue for five years even if the annuitant were to die after, say, three years.

Immediate Care Annuity
Sometimes also known as a Long Term Care Annuity or Immediate Needs Annuity, this is a specialised contract for people who require a high degree of care, such as an elderly person in a nursing home.  There are no standard rates for these contracts, as each one is individually underwritten.  However quotations may be obtained without cost or obligation.

Impaired Life Annuity
Similar to enhanced annuity, but the term normally refers to higher rates offered to those with more serious health issues such as cancer.

Index-linked
When the income is linked to a specific index, normally the Retail Prices Index (RPI).

Overlap
This is when a widow(er)’s pension is payable in addition to payments under a guarantee period.  For example, if a man bought an annuity including a 50% widow’s pension and a five-year guarantee period with overlap, and he died at the end of three year, then his widow would receive her 50% widow’s pension straight away, in addition to a further two years’ payments of the full amount under the terms of the guarantee period.  Without overlap she would receive just the guaranteed payments until the guarantee period expired, at which time the 50% widow’s pension would start.

Smokers Annuity
Special annuity rates are available for people who smoke regularly at the time they buy an annuity.

(With) Proportion
This is when an annuity payable in arrears makes a proportional payment when the annuitant dies.  For example if the annuity were to be payable annually in arrears, and the annuitant died four months into the year, then one third of a year’s payment would be made.

Unit Linked
A type of investment whereby units are bought in a fund, and the value of the units varies in line with the value of the underlying assets in the fund (e.g. shares). Some providers offer annuities which are backed by unit-linked investment funds.

Variable Annuity
Although covering several types of annuity, this term is most commonly used to refer to what is in effect an income drawdown plan with a guarantee underpinning the income.

With Profits Annuity
This is a annuity which is backed by the provider’s with profits pension fund.  An assumed bonus rate (ABR) is elected at outset, and each year the ABR is deducted from the income, and then the actual declared bonus rate is added back.  This means that if the actual declared bonus is more tan the ABR the income increases, but if it is less, then the income decreases.  For example, if a 3% ABR were to be selected, but at the end of year one the actual bonus declared was 4%, then the income would increase by 1%.

A higher ABR gives a higher initial income, but it also means there’s more chance of the income reducing in the future.

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