A Retirement Annuity is like having your own personal pension scheme. It is a good, safe form of investment because nobody will ordinarily have access to the funds before the selected maturity date. Even in the event of insolvency, a Retirement Annuity is relatively safe. The maturity date may be set anywhere between the ages of 55 and 70. It is important to note that there are different types of retirement annuities, namely:
Conventional or Fixed-interest Annuities
With a conventional or fixed-interest annuity, you pay in a sum
of money and, in return at maturity of the policy, you are paid
a fixed income every month for the rest of your life. The insurer
takes the responsibility for fluctuations in the market and the risk
that you may live longer than the average person. The advantage is that your regular monthly income is guaranteed for life. The disadvantages are that you get the same regular income every month or year, regardless of inflation rates. Your investment ceases when you die.
The Living Annuity
With the living annuity, you, and not the insurer, carry both the
investment and mortality risk. In short, the income depends on
the growth of the amount of money invested. The growth of the
money invested depends on the behaviour of the stock market. If the stock market does well, your investment will increase; if it falls, your investment will decrease.
Composite annuities are a mixture of conventional and living
annuities and to some extent offer the best of both. It provides
you with a flexible income from the living annuity portion and a
guaranteed income (security) from the conventional annuity part.