An Annuity is a single premium insurance policy that can be arranged through a life company. The single premium is often a lump sum from a pension. The life company continues to invest the lump but allows the policy holder to withdraw a specified level of income over the policy. The reason the annuity is considered an insurance product is because the life company offer the policy holder a specified level of income for the rest of their life.
Sometimes this type of insurance is called Longevity Insurance, life companies pool the monies from the annuity policies they hold and some policy holders will live longer than others. The level of income a policy holder will receive depends on the annuity rate offered at the time the policy is taken out. The annuity provider will consider a number of factors before they offer an annuity rate. For example; the individuals age, their state of health, the prevailing bond yields and the amount of the sum to be invested. Larger sums generally attract better annuity rates.
Annuity income is subject to income tax and Universal Social Charge “USC” by the individual. The life company will operate PAYE in much the same as an employer would an employee. It is important to note that on the death of the policy holder, generally any remaining funds are retained by the life company and do not pass to the individuals’ estate.