Qualified Financial Adviser (QFA) Pensions Exam 1 Practice Test

What is an annuity and when might it be used?

A contract paying a guaranteed income for life (or a fixed term); often used to convert a DC pot into secure retirement income. A flexible investment product with no guaranteed income. A loan against the pension pot. A government grant to boost pension savings.

Correct Answer:

A contract paying a guaranteed income for life (or a fixed term); often used to convert a DC pot into secure retirement income.

Explanation:

An annuity is a contract that converts a pension lump sum into a guaranteed income stream, typically payable for life or for a fixed term. This setup provides predictable retirement income and helps manage longevity risk, since you won’t outlive your funds. That makes it a common way to turn a defined contribution pot into secure, stable income in retirement. The other descriptions don’t fit an annuity: a flexible investment product with no guaranteed income doesn’t promise steady payments; a loan against the pension pot involves borrowing against assets rather than producing income; and a government grant to boost pension savings is a different kind of funding.

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