What Is An Annuity?

An annuity is a type of investment based on an individual or investment fund buying a product that will then earn and distribute an income on a pre-set basis. In many countries annuities are commonly used to provide retirement income and are often set up as part of a pension plan.

So, for example, when you reach retirement age you can (or may have to) use the fund that you have built up from your pension payments to purchase one or more annuities. These annuities will then provide you with the income that you have to live on during your retirement.

Annuities can also be purchased outside of a pension/retirement fund wrapper as individual investments if you like. You can then choose whether to take a deferred payment option where you wait a set number of years before the payments begin or an immediate payment where the annuity will pay out immediately. These investment products are often widely used to fund structured settlement compensation payouts.

There are also a couple of ways that you can buy an annuity. You can pay for it all at once and buy the whole product. This is often done in some countries when you qualify for a pension and have to invest your fund in one or more annuities. Alternatively, you can pay for annuities in stages as part of future financial planning if you prefer.

The way that annuities work can vary according to the way that they are set up. Some, for example, can be set up to pay a monthly income, some will pay quarterly and some will pay on an annual basis. The actual terms that you are given may depend on the annuity that you choose and how its terms run.

In many cases an annuity will last for your lifetime but may not carry on making payments after your death. In other cases arrangements can be made to continue with some or all payments that will be given to your next of kin.

You can, for example, factor your spouse into annuity payments so that they will still receive payments after you die. Another option here is to buy annuities that only pay out for a number of years rather than for your lifetime. Here, the payments would carry on being made to your spouse if you died before the fixed payments ended.

As with most investments you can choose the type of annuity you buy in terms of the returns that you will get. A fixed annuity, for example, will give you a fixed income for its lifetime. A variable annuity, however, will pay out according to how its underlying fund is performing on the stock market.

The choice that you make here depends on the level of risk that you are willing to take. A fixed annuity gives the greatest safety guarantee as you will always know how much money it will bring in. The payments here will not drop if investment performance drops, however, they will also not rise if the fund performs well.

A variable annuity option is a little riskier. Here you could well benefit from rises in the fund's performance. But, you will also have to accept lower returns in times when the fund's performance is not so good. No matter which annuity you favor it is always recommended that you take qualified advice before you choose a product here to make sure that you get the best solution to fit your overall circumstances.