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What are annuities? Simply stated, annuities consist of a bunch of equal payments that are made regularly, such as every week or every month.
Annuities come in many differing shapes and sizes. There are variable annuities and fixed annuities, immediate annuities and deferred annuities, gift annuities and retirement annuities, etc. Regardless of the nomenclature of your specific annuity, all cater towards the same purpose: providing a tax-deferred growth that can serve as a source of retirement income.
There are basically two ways with which you can purchase annuities.
- Single Payment Annuity - In this case, you pay 1 lump sum to buy a single payment annuity. Affords zero flexibility beyond initial agreement.
- Flexible Payment Annuity - Continuous payments made during the time intervals of your choosing.
Annuities have two phases, those being the accumulation phase, during which you accumulate gains on your untaxed money (allowing for much faster growth), and the distribution phase, during which you can decide to receive the payment in one lump sum, or annuitized into equal payments made regularly. You can choose the amount of the payments and timeframe over which they will be paid. (Somewhat similar to options a lottery winner receives) In this way, annuities can be seen as a source of retirement income as was mentioned above.
Whereas annuities used to be considered too expensive and highly inflexible, recent innovations have allowed for low-cost options coupled with a wide variety of investment options, making annuities a much more popular financial decision. Some of the benefits associated with purchasing annuities are as follows:
- Untaxed gains allow for faster investment growth
- Receiving a source of retirement income
- Freedom to switch between investments within annuity tax free
The subject of annuities seems complicated in nature, but it doesn't have to be. Check out some of our other pages to further your understanding of annuity investments and annuities as a whole.
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Learn more about FIXED ANNUITIES
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