Under European Union law, an annuity is a financial contract which provides an income stream in return for an initial payment with specific parameters.
It is a financial contract which makes a series of payments with certain characteristics: An annuity certain pays the annuitant for a number of years designated.
Cross-subsidy remains one of the most effective ways of spreading a given amount of capital and investment return over a lifetime without the risk of funds running out.
All varieties of deferred annuities owned by individuals have one thing in common in many jurisdictions: any increase in account values is not taxed until those gains are withdrawn.
In common with other types of insurance contract, both immediate and deferred annuities will typically pay commission to the sales person (or advisor).
Those in lower tax brackets may be told to avoid deferred pensions because they may not be able to recoup the charges made by the annuity company.
If not otherwise stated, it is always understood that an annuity is payable yearly, and that the annual payment (or rent, as it is sometimes called) is a single currency unit.
Other instances of perpetuities are the incomes derived from the debenture stocks of railway companies, also the feu-duties commonly payable on house property in Scotland.
Unsecured pensions operate under age-related income limits calculated by the Government Actuarial Department to prevent the fund being eroded too fast.
Following changes introduced by HMRC as part of the A-day legislation, individuals can now draw an income between zero and 120% of the "GAD rate".
The GAD rates are subject to periodic review and are based on the return of a level, single life annuity paid monthly in arrears without any guarantee or value protection for an individual in good health.
They may be granted either for a specified life, or two lives, or for an arbitrary term of years; and the consideration for them may take the form either of cash or of government stock, the latter being cancelled when the annuity is set up.
Savings bank depositors are not concerned with the manner in which government invests their money, their rights being confined to the receipt of interest and the repayment of deposits upon specified conditions.
The case is, however, different as regards forty millions of consols (included in the above figures), belonging to suitors in chancery, which were cancelled and replaced by a terminable annuity in 1883.
[5] The first writer who is known to have attempted to obtain, on correct mathematical principles, the value of a life annuity, was Jan De Witt, grand pensionary of Holland and West Friesland.
The latter contains the translation of a number of letters addressed by De Witt to Burgomaster Johan Hudde, bearing dates from September 1670 to October 1671.
Before leaving the subject of De Witt, we may mention that we find in the correspondence a distinct suggestion of the law of mortality that bears the name of Demoivre.
He gave the first approximately correct mortality table (deduced from the records of the numbers of deaths and baptisms in the city of Breslau), and showed how it might be employed to calculate the value of an annuity on the life of a nominee of any age.
[8] Previously to Halley's time, and apparently for many years subsequently, all dealings with life annuities were based upon mere conjectural estimates.
was adopted in the Roman Empire, and which declared that a testator should not give more than three-fourths of his property in legacies, so that at least one-fourth must go to his legal representatives.
[7] Commutation tables, aptly so named in 1840 by Augustus De Morgan (see his paper "On the Calculation of Single Life Contingencies," Assurance Magazine, xii.
The earliest known specimen of a commutation table is contained in William Dale's Introduction to the Study of the Doctrine of Annuities, published in 1772.
Morgan gives the table as furnishing a convenient means of checking the correctness of the values of annuities found by the ordinary process.
[7] The first author who fully developed the powers of the table was John Nicholas Tetens, a native of Schleswig, who in 1785, while professor of philosophy and mathematics at Kiel, published in the German language an Introduction to the Calculation of Life Annuities and Assurances.
1–20 (Sept. 1850), an account of it, with a translation of the passages describing the construction and use of the commutation table, and a sketch of the author's life and writings, to which we refer the reader who desires fuller information.
[9] The use of the commutation table was independently developed in England-apparently between the years 1788 and 1811—by George Barrett, of Petworth, Sussex, who was the son of a yeoman farmer, and was himself a village schoolmaster, and afterwards farm steward or bailiff.
Barrett's method of calculating annuities was explained by him to Francis Baily in 1811, and was first made known to the world in a paper written by the latter and read before the Royal Society in 1812.
[10] By what has been universally considered an unfortunate error of judgment, this paper was not recommended by the council of the Royal Society to be printed, but it was given by Baily as an appendix to the second issue (in 1813) of his work on life annuities and assurances.
But the formation of the institute led to much greater interchange of opinion among actuaries, and afforded them a ready means of making known to their professional associates any improvements, real or supposed, that they thought they had made.
Among the useful objects which the continuous publication of the Journal of the institute has served, we may specify in particular two:--that any supposed improvement in the theory was effectually submitted to the criticisms of the whole actuarial profession, and its real value speedily discovered; and that any real improvement, whether great or small, being placed on record, successive writers have been able, one after the other, to take it up and develop it, each commencing where the previous one had left off.