Types
Annuities are a type of agreement made with an insurance company for a contract that provides tax-deferred income following your retirement. Annuities typically are one piece of an investment portfolio. There are a number of different kinds of annuities, ranging from variable annuities to charitable, fixed and pension annuities. The type of annuity purchased depends on the needs and plans of the account holder. Annuities vary in how they are financed, how they pay out and what kinds of earnings they can provide. Annuities usually provide tax benefits to those who use them by deferring tax payments until retirement, when the tax burden usually is lower.
Investments
Variable annuities are commonly purchased as part of a retirement planning portfolio as an investment that can either increase in value or remain the same, depending on the performance of the market in which the investor participates. Insurance companies sell variable annuities, which allow investors to purchase subcontracts that often compete with mutual funds and other market investments. Annuities can have fixed interest rates they pay out to account holders or variable rates that adjust with the market. As the annuity total grows, no taxes are paid on the initial investment or on the earnings as long as withdrawals do not begin until after the investor turns 59-and-a-half.
Benefits
Many businesses offer retirement plans to employees in the form of annuities. A tax-sheltered annuity is one set up by nonprofit employers. Also called a 403(b) plan, a nonprofit employer can place pre-tax dollars into the annuity on behalf of its employees, who then can draw on the money after they retire and pay taxes on the disbursements. Retirement annuities are similar to old-fashioned pension plans that employees received from the employer upon retirement. They can take as many different forms as there are annuity plans.
Payments
The payouts from annuities can be set up in a variety of different ways as well. An annuity can begin paying benefits to the account holder immediately upon its establishment. Deferred annuities typically begin paying a monthly amount when the account holder retires or turns a specific age as stated in the original contract. Disbursements can be set or vary, depending on the original agreement and if the investment was subject to market fluctuations. Death benefits are paid to beneficiaries in a number of different ways as well. A beneficiary could receive the entire balance of the annuity in one lump sum following the death of the account holder, or funds can be deferred for a period of time.
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