A distribution of money that is earned on an investment on a set schedule such as quarterly, biannually, or annually is known as an annuity. Typically, an annuity is used as part of a retirement plan. Once the annuitant, or recipient, stops working, an annuity ensures a fixed and stable income. An annuity may be designed such that it provides income for two.
Retirement Pension – A form of Annuity
Retirement pension is a common form of annuity. At the time when the retiree was working, he or she paid into a pension fund which was invested. After the job is over and the person is retired, the return on the investment is transformed into an annuity which is distributed to the retiree.
How does Annuity works?
The annuitant has the choice to either invest in installments, or purchase an annuity having a lump sum. Annuity is not like life insurance, as it does not require a physical examination. Rather than rather funding surviving children or partners, annuity is used to fund the individual during his or her lifetime, except in certain situations .
A contract has to be signed to establish Annuity
When the annuity is established, a contract is signed by the annuitant which outlines the exact terms of the annuity. This contract also mentions the length of time that it covers and whether or not it will be fixed.
Types of Annuity
There are two types of Annuity
- Fixed Annuity
- Variable Annuity
Fixed Annuity
It is safe to invest in a fixed annuity. The reason behind this is that it guarantees the return of a set amount of money with every payment. Although, if there would be any improvement in the market, it will have no effect on the annuity payments and they will still remain the same.
Variable Annuity
In a variable annuity, there would be a variation in payments and that variation depends on how well the investment is performing. This could either bring more money if the market is performing well, but in case the market is not in good conditions then this can also leads to smaller payments.
Take advise from Financial Planner
If you are confused as to which option you should choose then you may contact a financial planner. He would advise you that which option is better for the annuitant.
For instance, a couple might be willing to consider one fixed and one variable annuity, while a single retiree who has no other income resources other than the annuity then he or she should probably choose a fixed annuity.
Annuity ceases with the death of annuitant
In majority cases, the annuity ceases once the annuitant dies. There are rare cases, in which an annuity can be contracted to roll over to a surviving spouse or minor children.
Annuity can be given to minor surviving children
If we talk about government pensions, then in that case surviving children are allowed to collect annuity until they turn 18 or 21, depending on the prevailing laws.
Most of the financial firms establish such annuities which end with death, as they assume that some annuitants will die before they have made the return on their investment, while others will outlive their investment, which would leave a margin for profit if the company invests well.
Thanks for the post, great info.