What Is an Annuity? An annuity is a series of payments between you and a financial institution. As it is an insurance product, they are typically handled by the same insurance companies that provide life insurance. To start an annuity, you make a lump-sum or series of payments which the insurance company accepts and then grows the funds. The company agrees to provide you with payments from these funds over a fixed period of time, beginning immediately or at a set date in the future. Annuities are often used for retirement age individuals to generate some steady income.

In a fixed annuity, the company provides a stable rate of interest to be paid back to you over the course of your growing account or over a specific set time, such as 25 years or over your lifetime. The company typically invests your money in low risk government securities and bonds, which allow them to guarantee you a set interest rate.

In a variable annuity, the interest rate is not guaranteed, as it depends on the performance of the investments. The company invests in high risk securities, or you may also be able to select your own investments in the money markets from a variety of options, such as mutual funds. The benefit with a variable annuity is that deposits made into the annuity are tax-deferred.

Another factor that affects annuity rates is your own life expectancy. They may also be subject to market conditions or the financial policies of the government. In the United Kingdom, they are also affected by gilt yields.

Like any insurance product, you are best served by shopping around. Contact various insurance companies to find the higher rates of return on the annuity, as well as doing your research as to what types of investments the company uses. Higher performing investments mean better chances of higher returns. Annuity agents or brokers can answer your questions and provide you with detailed information about how an annuity may work for you.

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