An annuity refers to an insurance contract issued by an authorised insurer (the annuity provider), based upon a single amount invested with that provider that, in return, guarantees a regular income to the investor.
Whilst great for peace of mind, the income paid is dependant upon market rates being reasonable at the time, as once purchased at a rate, it's fixed and there's no going back!
Annuities are fully or partially taxable, depending upon whether the money invested has come from your private pension.
The annuity income paid to the investor is itself available in different forms, subject to the investor's preference.
Income payments can be guaranteed for a minimum period and so pay-out the shortfall if an investor dies early.
Annuity income can remain at the same amount (called a level annuity), or rise annually in-line with inflation, or be a fixed percentage (called index-linked).
These can then be on a joint-life basis, meaning they will pay income to the death of the last life at the same or a reduced amount, as required.
Annuities are generally used by those without significant wealth to invest, or those more at risk from the effects of adverse investment market volatility, or by others looking for a guaranteed income for life.
Not only is the best payment rate important, but so too is the insurer's financial strength, as you must be sure they will remain able to pay your annuity for life.