What is an Annuity? Basics of Annuities

Typically used in the context of a retirement fund, an annuity is an agreement that one person or organization will pay another person or organization a series of payments. Most workers pay part of their income to a pension fund, and when these workers retire, their money is paid back to them in the form of an annuity, the money being transferred to the retiree on a fixed basis.

To set up an annuity, most people work with a firm. You can either fund an annuity in segments, perhaps contributing a certain amount of money each time you get your paycheck, or you can purchase an annuity with a lump sum. Annuities can then be used to fund the individual’s living expenses throughout his or her entire lifetime. Upon signing the contract to create the annuity, you select the terms of the annuity, which means you can determine how long the annuity will last and how much money will be distributed.

There are two main types of annuities. A fixed annuity is the safer investment because it makes sure that you will receive the agreed upon amount of money at regular intervals, no matter the economic situation. The downside of such an agreement is that if the economy were to suddenly improve and become profitable, the annuity still pays the same amount. A variable annuity varies with the market, so a weak market means smaller payments while a strong market means larger payments.

Once the person holding the annuity dies, the annuity ends. However, in such cases as government pensions and other specific cases, the annuity will roll over to spouses or children, with children able to collect from the fund until they are either 18 or 21 years old, depending on the laws in your area.

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