An annuity is a financial product whereby after taking your tax-free lump sum from your pension fund you elect to allow the insurance provider / pension provider (or another insurance provider / pension provider) to retain ownership of your residual pension fund and in return they will give you a guaranteed income for the rest of your life. Sometimes this annuity income will also allow a partial income payment for your spouse in the event of your subsequent death.
The obvious advantage here is the security of income but the disadvantage is that you will have to live a long and healthy life before you eventually get back the value of your residual fund by way of income over your lifetime. There are various add ons to annuities such as a partial spouse payment in the event of your death but the basic concept stays the same in that purchasing an annuity involves giving up ownership of your residual pension fund in return for a guaranteed income.
For many people the notion of giving up ownership of the pension fund allied to historically very low annuity rates leads them to ask the question – is there another option?
The answer is Yes – you may prefer to elect to use the residual fund to invest in an ARF / AMRF – an Approved Retirement Fund / Approved Minimum Retirement Fund.