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Originally, an annuity simply meant an annual payment. That's why the retirement income you receive from a defined benefit plan each year, usually in monthly installments, is called a pension annuity.
But an annuity is also an insurance company product that's designed to allow you to accumulate tax-deferred assets that can be converted to a source of lifetime annual income.
When a deferred annuity is offered as part of a qualified plan, such as a traditional 401(k), 403(b), or tax-deferred annuity (TDA), you can contribute up to the annual limit and typically begin to take income from the annuity when you retire.
You can also buy a nonqualified deferred annuity contract on your own. With nonqualified annuities, there are no federal limits on annual contributions and no required withdrawals, though you may begin receiving income without penalty when you turn 59 1/2.
An immediate annuity, in contrast, is one you purchase with a lump sum when you are ready to begin receiving income, usually when you retire. The payouts begin right away and the annuity company promises the income will last your lifetime.
With all types of annuities, the guarantee of lifetime annuity income depends on the claims-paying ability of the company that sells the annuity contract.
annuitya series of equal payments at fixed intervals deriving from an original lumpsum INVESTMENT.
annuitya series of equal payments at fixed intervals from an original lump sum INVESTMENT. Where an annuity has a fixed time span, it is termed an annuity certain, and the periodic receipts comprise both a phased repayment of principal (the original lump sum payment) and interest, such that at the end of the fixed term there is a zero balance on the account. An annuity in perpetuity does not have a fixed time span but continues indefinitely and receipts can therefore come only from interest earned. Annuities can be obtained from pension funds or life insurance schemes.
A sum of money received on a regular basis as one of a series of fixed payments. Real property is sometimes sold in exchange for a private annuity.The buyer guarantees a fixed monthly income to the seller for the seller's lifetime.The seller, of course, is gambling he or she will live much longer than anyone could expect,and thus ultimately receive far more than the property was worth. The buyer is gambling that the seller will die sooner as opposed to later, and the buyer will have a windfall.Wise sellers will include a clause guaranteeing a minimum term for payments,even if they must be made to their estate or heirs.See advance payment annuity and ordinary annuity.