When you retire, there are many decisions that you are going to have to make to ensure that you are able to live comfortably for the rest of your life. Many of those decisions will have to come fairly early on, of course, to ensure that you are going to benefit from them upon retirement. 

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In particular, you will need to plan for the financial side of being retired, and that is something that a lot of people find to be surprisingly complex. One common way to receive income during retirement is with an annuity. But what exactly is it, and what do you need to do about it to make sure that it works for you?

What is an annuity?

First of all, it is good to know exactly what an annuity is. Put simply, it is a financial product that pays out a fixed stream of payments over a specified slot of time. An annuity is purchased using your own pension pot. They are paid to an individual, and they are one of the most common ways that people receive money during retirement.

As you can imagine, an annuity is potentially a very useful way of ensuring your financial security throughout your retirement, as you will receive money regularly rather than in a lump sum. Annuities are created and sold by different financial institutions like banks, starting with the accumulation phase and resulting in the annuitization phase – that is where you actually get your money.

Why should I take out an annuity?

You might be wondering why you might want to use an annuity as a means of getting cash in retirement. With a steady income stream, you might find it a lot easier to maintain your financial security.

You won’t be able to spend it all in one go, and that means that you will be able to more effectively plan for the remainder of your retirement years without having to worry. This level of security is something that a lot of people are trying to find, and it is easy to see why you might need to get it when you retire. An annuity is able to give you that in an easy and straightforward manner.

Types of annuity

There are a number of different structures and types of annuity which exist, partly because it is such a flexible way of arranging your cash and you can basically approach it in whatever way is going to be suitable for your own personal situation.

You will need to speak with an adviser to understand all the options, but it is important to understand some of the factors that are going to be moved around as a part of arranging and organising your annuity.

For instance, you can alter the duration of time that payments from the annuity are guaranteed to continue, the frequency of those payments, the amount of each payment, and so on. You can fix it so that it pays out for exactly a set number of years, or until someone passes away. All of this flexibility makes it a very useful way to structure your income.

You can also structure your annuity so that it immediately starts paying out after receiving a lump sum, or so that the payments are deferred by a certain amount of time, whether months or years. This option is likely to be especially useful if you are considering using annuities in retirement, as that way you can be sure that you are going to receive the payments when you really need to.

Fixed & Variable annuities

There are both fixed and variable annuities available, and yours will be one or the other. In a fixed annuity, you receive regular payments as set out. Variable annuities allow you to alter the payments you receive in the future.

That might be useful if an investment that the annuity is based on does particularly well, for instance, or if you feel that there is a chance that your circumstances might otherwise change. This helps to accommodate for risk, which is an important part of ensuring that you are managing your retirement years as well as possible.

There is plenty to understand about annuities, but the main takeaway is that they are an incredibly useful way of receiving regular cash injections during retirement. They can be very helpful in keeping your finances well organised for the rest of your life.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

Past performance is not a reliable indicator of future performance and should not be relied upon.

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