Annuity

The insurance company bears the uncertainty associated with the rate of return that will be achieved on the underlying assets (investment risk) and, for a lifetime annuity, how long the person will live (longevity risk).

Lifetime annuities come in many different varieties, with optional features including rates of increase, guarantee periods, and payments for surviving dependants. The common theme is that protection against longevity risk and investment risk is provided in a single bundled product.

The cost of lifetime annuities rises as expectations of life increase.

In the pensions context, annuities are often used by individuals retiring from defined contribution pension funds to convert their accumulated savings into a guaranteed income stream. Defined benefit pension funds may also purchase annuities from insurers as part of de-risking strategies, such as buy-ins or buy-outs, to secure future pension payments and transfer longevity and investment risks.