Annuities: turning savings into guaranteed income

An annuity is a product — usually from an insurer — that converts a lump sum into a guaranteed stream of income, often for the rest of your life. It's mainly used in retirement.

What problem it solves

The big fear in retirement is outliving your money. An annuity removes that risk by guaranteeing income no matter how long you live — a form of longevity insurance.

Common types

• Lifetime annuity: income for life.
• Fixed-term annuity: income for a set number of years.
• Inflation-linked: payments rise with prices (lower starting income). See inflation.
• Joint annuity: continues paying a surviving partner.

The trade-offs

Pros: certainty, simplicity, protection against outliving savings and market falls. Cons: you typically give up access to the lump sum; income may be modest; most offer little to leave to heirs; rates depend heavily on interest rates and your age/health when you buy.

Where it fits

Some retirees annuitise part of their savings to cover essential bills, keeping the rest invested for flexibility and growth.

Key takeaway

Annuities buy peace of mind — guaranteed income — at the cost of flexibility and potential growth. They can be a sensible piece of a retirement plan, rarely the whole of it.