Pensions A-Z
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Yield (on an annuity)
An annuity in the context of pensions is a financial contract in the form of an insurance product in which an issuer makes a series of payments from the date of retirement until the death of the purchaser (annuitant) in exchange for a cash sum. Yield is the amount of money returned to the annuitant. An annuity can be purchased within a pension scheme or from an outside agency, typically a financial institution such as a life insurance company (often called the Open Market Option).
The payment stream from the issuer to the annuitant has an unknown duration based principally upon the date of death of the annuitant. At this point the contract will terminate unless there are other annuitants or beneficiaries in the contract, and the remainder of the fund accumulated is forfeited. Thus a life annuity can be seen as a form of longenvity insurance, where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients.