Annuity

Financial Dictionary -> Loans -> 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.