An annuity is an amount of money payable to a person at specified intervals. Usually, pensions for elderly people are derived from retirement annuity contracts. Personal pension plans are also paid as annuities. Insurance or investment arrangements can also deliver annuity payments, such as, when you deposit a huge sum of money to an insurance organization or a bank and buy an annuity and this organization in turn pays you a specified amount every specified interval for, perhaps, the rest of your life.

Annuities can be of several types, but mainly, every type of annuity can be classified as either immediate or deferred and variable or fixed. Obviously, this means, the amount to be paid to the investor or insurance buyer can be immediate, that is payment starts as soon as the annuity is purchased, or deferred, that is the payment will start at a later date. A fixed annuity guarantees a return of a specified amount immediately after purchasing the annuity or at a deferred date that can be after you retire from work. In either case, fixed annuities convert a lump sum amount into a steady stream of regular income and help evade huge tax payments. Investments associated with guaranteed or fixed annuities are usually low-risk securities like government bonds. Also, these annuities are not influenced by the changing rate of inflation over the years.

A major advantage of fixed annuities is that they enforce savings by restricting you to withdraw money for certain periods, say 5, 10, or more years. You may be allowed to draw only the interest amount or perhaps just 10 percent of the principal amount. Sometimes, different insurance or banking organizations allow you to use the invested money, but there may be some financial penalty attached, which will be mentioned in the contract document.

Fixed annuities can be life annuities, in which you can annuitize the money to be paid to you till death, or term certain annuities, which are annuities, contracted till a fixed period of time. In either case, remember that annuities were created to offer a financial protection against longevity, and hence, the annuity you choose should be able to perform well in this area.

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