Understanding what an annuity is

Buying an annuity is one of the most effective ways to ensure your retirement income. Although not that many people arrange these types of investments since the pension plans have been enacted, they can turn out to be good investments. Why you should buy an annuity? The fact is that the money invested in not taxed, not to mention that you have assurance that you have a form of payment when you retire. Based on your earnings, you have guaranteed income. While this form of investment may not be particularly appealing, it continues to serve the needs of investors. In this article we will try to explain what is an annuity and what are the benefits of buying one.

Definition of annuity

An annuity can be broadly defined as insurance products that can be used as a retirement strategy. More precisely, it is a contract, an agreement between you and a life insurance company that protects you in case you lose money. When you sign this contract, you receive a managed pool of assets and you agree to make a series of payments for a predetermined period of time. The payments can begin following the signing of the agreement or sometime in the future. The main goal of annuities is to mitigate against the risk of living one’s income, reason why you cannot retire your funds without a penalty before reaching the age of 59.

Types of annuities

As mentioned before, annuities represent fixed payments of a certain amount of cash that you have to make at the time period specified by the party. There are two main types of acquisitions: ordinary annuities and annuities due.

  • Ordinary annuity: The series of payments are required at the same time period of time and they are all in the same amount. They are usually made at the end of each month, quarter or year. Basically each payment belongs to the payment time prior its date.
  • Annuity Due: The payments have to be made at the beginning of each period. More precisely, payments are made sooner and they thus have a higher present value.

The size of the payments depends largely on the performance of the investment in time. It is important to keep in mind the fact that the value of these investments can differ, so it is necessary to use an annuity formula in order to determine the present and future value.

The benefits of buying an annuity

The contract is designed so as to provide you payments at retirement. To put it simply, the payments that you make on a regular basis accumulate until the time they are handed over to the beneficiary. Regardless of how long you live, you can rest assured that you will not run out of revenue. Another benefit of this form of investment is that you have the opportunity to choose from several payout options. For instance, you can make the contract for life or for a period of 10 years. What is more, it can complement other retirement income sources, notably pension plans.