There are some complicated issues around annuities. With so many to choose from, and many different rates. You can find options that apply only to yourself, or other dependants, or a partner, and then there’s the complexity of clauses relating to death. One thing is clear: in order to get the best deal for yourself it really pays to understand what you’re getting into first.

One annuity option which is proving increasingly popular is that of the guarantee period. But what it is and why would anyone use it?

Basically lifetime annuities provide a set amount of money to a retired person so that they have a regular income for the remainder of their lifetime. At the start of the policy a client is given a life expectancy, and thus if they outlive this boundary they stand to profit from the deal with the provider. On the other hand if the client were to die before this date the provider stands to profit from the arrangement – in this way the providers have reason to want to provide lifetime security. But where does this leave the client involved?

Well, if you pay, for example, 100,000 for your annuity and you live only a couple of years after the time you take the annuity out, then the provider profits and your estate loses out quite substantially. It could mean you have spent a large pension fund only to take a fraction of this back in the form of an annuity income. And this is where the guarantee period comes in. If you have a guarantee period with your annuity, it means the provider will definitely pay out for at least that period in the event that you die before it is reached. So, for example, if you take a 5 year guarantee period but pass away only 2 years into your annuity, for a further three years the provider will continue to pay your spouse or next of kin that annuity income.

With this in place there’s less worry involved in taking out a plan. You have a set minimum rate of income guaranteed, and security in place for any eventuality. However, a user should be aware that such a policy would mean a lower rate of return than a policy without a guarantee.

Find out more about getting the best annuity rates