An Annuity is a product an individual funds him or herself so that he or she can receive a stream of payments in the future. It is usually used to secure a steady income when the person retires. Each annuity can be structured differently from the others. The annuitant or the spouse is entitled to receive payments at a pre-agreed date. Some annuities provide fixed amounts of payouts at a fixed duration of time even if the annuitant is no longer alive.
Annuity can also offer fixed or variable payments for a certain period. A variable annuity is often preferred by an annuitant if he wants to receive variable payments, depending on the performance of the annuity fund. Unlike a fixed annuity, it provides a less stable cash flow. However, the annuitant can generate more income if the fund posts strong returns.
Annuity is designed for people who are risk-averse or are nearing retirement age already. People who have to appetite for short-term volatility often prefer annuities because these investments have moderate risks. An annuity is actually an agreement between an insurance company and the annuitant, wherein the annuity agrees to pay a fixed amount of money periodically for a fixed period of time. In most cases, it provides a guaranteed income later in life.
An annuity can be a tax shelter because contributions are deducted from taxable earnings each year. In addition, the earnings of the annuity are tax-free until such time that the annuitant is ready to receive payments from it. For young investors, an annuity can be a very attractive investment because they can contribute to the fund for years and aren’t taxed on its earnings thus further increasing the compounding benefits of the fund.
A lot of annuities penalize annuitants who withdraw funds before the agreed date of payouts. In addition, there are tax provisions which encourage annuitants not to withdraw from the funds until they’ve reached a minimum age. There are also annuities which allow at most 15% withdrawal during emergencies without penalizing the annuitant.