What is an annuity?
An annuity is a contract between an individual and an insurance company that allows you to accumulate money on a tax-deferred basis and arrange for a guaranteed stream of income payments, usually when you retire. When you begin to take payments, they may be subject to income tax, and if taken before age 59 1/2, an additional 10% penalty. These guaranteed payments are backed by the claims-paying ability of the issuing insurance company.
A contract from an insurance company that individuals generally use to accumulate money for their retirement on a tax-deferred basis and that guarantees a fixed or variable payment to the annuitant at some future time. The guarantee associated with annuities are based on the claims paying ability of the issuer.
It is a contractual agreement with an insurance company that guarantees a certain interest rate and payout stream in exchange for a premium. An easy way to look at it is to break down the parts. The premium can be put into a accumulation stage where the premium earns interest tax-free. The payout phase is when the accumulated money is paid out to the client..
When you reach retirement, you may decide that you want the certainty of a guaranteed level of income for the remainder of your retirement. This type of pension income is known as an ‘annuity’ and is the traditional way of taking benefits. What will happen is that the pension company will take your pension fund (less your tax-free cash sum if you decide to take it) in return for guaranteeing a specific level of income. The annuity will cease upon your death unless you have made provision for your spouse or partner to continue receiving all or part of that income for the remainder of his or her lifetime. Of course, some people live longer than others and will therefore receive greater benefit from the terms that they have secured with their pension company, whilst others die sooner than expected. Monies gained by the pension company from not having to pay a pension for as long as they originally expected to one person will be used to subsidise the extra cost of funding those who live lo
