Annuities

An annuity is a contract sold by financial institutions that provides a series of payments made at regular intervals in exchange for an initial premium or series of premiums. The primary purpose is to convert capital into a predictable income stream, often for retirement, and to manage longevity risk.

Annuities are described by timing of payments (immediate and deferred) and by the method of crediting interest or investment gains (fixed, variable, and indexed). They can be funded with a single premium or flexible ongoing payments. Payout options include life annuities (payments for the life of the recipient), joint and survivor annuities, and period-certain annuities that continue for a defined number of years.

In a typical arrangement, funds are paid to the issuer during an accumulation phase, then converted into a stream of payments at annuitization. Immediate annuities begin payments soon after purchase; deferred annuities delay payments until a future date. Some products offer eligibility for cost-of-living adjustments or death benefits.

Guarantees vary by contract and insurer. Fixed annuities promise a minimum payment amount; variable annuities credit payments based on the performance of underlying investment options but carry investment risk; indexed annuities tie credited interest to an index. Surrender charges and fees may apply for early withdrawal. Annuities are subject to insurance regulation and insurer credit risk.

Tax treatment depends on jurisdiction; in many systems, the principal is returned tax-free and earnings are taxed as ordinary income when withdrawn. Withdrawals prior to certain ages may incur penalties. They are commonly used for retirement planning, estate planning, and risk management.