An annuity is a distribution of money earned on premium deposit set on a schedule such as quarterly, biannually, or annually. Typically, an annuity is used as part of a retirement plan, to ensure a fixed and stable income once the annuitant, or recipient, stops working and an annuity may be designed to provide income for two. A common form of annuity is a retirement pension. While the retiree was working, he or she paid into a pension fund which was invested. After retirement, the return on the investment takes the form of an annuity distributed to the retiree.
Most people work with a financial consultant to set up an annuity. The annuitant can either deposit contributions in installments, or purchase an annuity with a lump sum. Unlike life insurance, an annuity does not require a physical examination and is used to fund the individual during his or her lifetime, rather than surviving children or partners, except in certain circumstances. When the annuity is established, the annuitant signs a contract which outlines the exact terms of the annuity, including the length of time that it covers and whether or not it will be fixed.
A fixed annuity is a safe financial product, because it guarantees the return of a set amount of money with every payment. However, should the market improve, the annuity payments will still remain the same. In a variable annuity, the payments will vary depending on how well the investment is performing, which can translate into making more money, but can also result in much smaller payments in a weak market. A financial consultant can provide advice on what options are available based on your planning strategy. For example, a couple might want to consider one fixed and one variable annuity, while a single retiree who intends to rely solely on the annuity for income would probably choose a fixed annuity.
In most cases, the annuity ceases once the annuitant dies. An annuity can be contracted to transfer by beneficiary designation to a spouse or minor children. This is common with government pensions, which surviving children can collect until they turn 18 or 21, depending on the prevailing laws.
This information is not intended to be tax or legal advice, and it may
not be relied on for the purpose of avoiding any federal tax penalties.
You are encouraged to seek tax or legal advice from an independent
professional advisor.
