Annuity

An annuity is a contract with an insurance company that converts a lump sum into guaranteed periodic payments, either immediately or starting at a future date.

Types of Annuities:

By Timing:

• Immediate annuity: Payments start within a year
• Deferred annuity: Payments start years later

By Investment Type:

Type	Returns	Risk	Best For
Fixed	Guaranteed rate	Low	Safety seekers
Variable	Market-linked	High	Growth potential
Indexed	Index-linked with floor	Medium	Balanced approach

By Payment Structure:

Single Premium Immediate Annuity (SPIA):

• One lump sum payment
• Immediate income stream
• Simple, transparent

Deferred Income Annuity (DIA):

• Buy now, payments start later
• Good for longevity insurance

How Annuity Payments Work:

Payout Calculation Factors:

• Premium amount
• Your age (and spouse's)
• Interest rates
• Payment option chosen

Payment Options:

Option	Payment	Continues After Death
Life only	Highest	No
Period certain	Medium	Yes, for set years
Joint & survivor	Lower	Yes, for spouse

Annuity Pros:

• Guaranteed income for life
• Protection against outliving money
• Tax-deferred growth (deferred annuities)
• No contribution limits

Annuity Cons:

• High fees (especially variable)
• Surrender charges
• Inflation risk (unless indexed)
• Illiquidity
• Complex products

Who Should Consider Annuities:

• Those without pensions
• Risk-averse retirees
• Those worried about longevity