Annuity
Annuity is a financial term that refers to a series of equal
payments that are usually made at regular intervals for a set amount
of years or for the person’s lifetime.
In a broad sense lots of payments are set up in annuity, including
mortgages, regular payments in to a savings account, and others, but
the term is generally used in regards to retirement funds or life
insurance.
If somebody took out a life insurance policy to be paid as an
annuity, then the process would usually entail investing large lump
sum, which will make capital gains, in return for fixed payments
over the life of the investor. Basically, money is put away safely
and paid back out at regular intervals with capital gains.
Some annuity life insurance policies work more like regular life
insurance, where money is paid in over the person’s lifetime, and
when they die the beneficiaries get an amount back. Obviously in
this case it is paid out in annuity rather than a lump sum.
In a retirement fund, the person retiring will have paid in money
during their younger years (sometimes a lump sum, sometimes regular
payments), and when they hit retirement, they will then receive
regular payments back from the fund until death, or until they
exhaust the amount or the terms of the agreement.
Investments in annuity accounts are tax deferred, meaning they are
allowed to grow tax free. Tax is only charged when the account
holder withdraws any funds or starts to get paid at the regular
intervals agreed on.
Annuity investments are considered low in risk, but also low in
return. They are generally used for convenience, rather than to make
money. They can be compared to savings accounts.