a to z of finance

A is for Annuity and also for Advisers:

An annuity is an annual income that a pensioner pays for with a lump sum. The amount of the annuity is set at the time of purchase for the rest of the life of the investor who buys it. Level term annuities pay the same sum each year, while index-linked annuities increase in line with the cost of living. Guaranteed income annuities pay out for a set time even if the investor dies earlier, and dependant's annuities cover a surviving spouse, but they will pay less than a level term annuity.

Pension annuities are what you buy when you cash in your personal pension. Flexible annuities are income taken from a fund you will eventually use to buy an annuity.

The older you are when you buy an annuity, the larger the income you get because your life expectancy is shorter. Men get bigger annuities than women of the same age because the men will enjoy them for a shorter time. Smokers can get bigger annuities than non-smokers for the same reason. Last week, for example, for pounds 100,000 a man of 65 could buy an income of pounds 11,428 for life, but a woman of 65 would only get pounds 10,448 a year. At 75, the same man could buy pounds 14,641, and a woman pounds 13,383.

The annuity will be greater than the interest on a deposit because you cannot get your capital back once you have bought the annuity. Annuity rates are based on the current yield on government stocks maturing in 15 years' time. The timing of the purchase is very important: when yields (which behave rather like interest rates) are high, a given lump sum will buy a bigger annuity; when yields are low, the same lump sum will buy a smaller annuity.

In October 1990, a man of 60 could have bought an income of pounds 15,370 for pounds 10,000. In 1993, the same sum would have bought only pounds 10,140 and last year it would have edged up to pounds 10,810 but it could drop below pounds 10,000.

You do not have to give up work to buy an annuity and you can now invest your pension plan and take an annual income instead. Annuities can be bought from any life assurance policy and not just from the company that provided the pension plan, so it pays to shop around.

ADVISERS: according to the Financial Services Act of 1988, financial advisers alone are allowed to give specific investment advice to individuals. They must be members of a regulatory authority with a compensation fund and must abide by strict rules. Their advice is meant to be "best advice", tailored to the individual's needs. It can only be given after advisers have asked a series of specific questions, known as a fact find, to establish the investor's full financial circumstances.

Advisers must also provide investors with a written report outlining the key features of the products they are recommending and how much it will cost in charges and commissions payable to the adviser.

There are two types of adviser: appointed representatives who work for a limited number of product providers or are tied agents of a single provider, and can only recommend products of those companies; and independent financial advisers who should be able to choose from the complete range of providers to produce the ideal product and provider. Independent advisers take commission from the product provider or charge you fees. Be sure who you are dealing with, what and how you will be charged.

CG