As mentioned elsewhere on the site, an annuity in simple terms is a contract in which you give another party, typically an insurance company, a lump sum of money and in exchange, you are given an agreed level of income over an agreed period of time.

In the UK annuities can be roughly split into two main types:

1. Purchased Life Annuities
   
2. Compulsory Purchase Annuities

Purchased Life Annuities

These are not necessarily purchased during retirement but at any time in someone's life when one needs a income stream and has a lump sum to invest.

You might want to:

• top-up existing pension income;
• pay for fees such as those for a retirement home;
• get additional income until you receive your pension;
• get a regular income until other investments mature;
• provide income for a child or grandchild at college or university.

You might need and income and have a lump-sum to invest from a source such as:

• a sale of a house or shares;
• a tax-free lump sum from a pension fund;
• your savings;
• an inheritance;
• an unexpected windfall;
• a maturing life plan; or
• a redundancy payment,

A purchased life annuity can be arranged over various period of time to suit you needs.

The gross income payments are made up of two parts, a 'capital' part and an 'interest' part. The capital part is treated as a return of your capital and so is not taxed. The interest part is normally paid after deducting tax at the savings rate. You may need to pay more or less than this, depending on your tax position and other assets or sources of income.

Compulsory Purchase Annuity

These are purchased with the proceeds of a registered pension scheme. Examples of these include Personal Pension Plans and Stakeholder Pension Plans. They can also be purchased from the proceeds of Occupation Pension Schemes.  A pension is purchased for the rest of your life. The pension must satisfy the pension scheme rules or policy provisions of the source funds.

Any reference to legislation and taxation is based on our understanding of law and HM Revenue & Customs practice at date of publication. Legislation and taxation are liable to change in the future. You may wish to consult with a professional before you make any decisions.