Annuity, Annuities, Recurring Income

November 23, 2010Asset Managementby EconomyWatch

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An annuity refers to a financial contract that accumulates value and pays it out over a period of years. It is offered by a financial institution. Annuities are normally regulated by various jurisdictions. Due to this, the term annuity has different features in different parts of the world.

An annuity is an alternative retirement plan. When you purchase an annuity, you enter into a contract with the issuer through which you promise the issuer a principal amount in lieu of which the issuer promises to make you a payment over a period of time. This is achieved by the issuers by investing your money into various financial products.

Since the payment is made on a regular basis, this is also known as recurring income. Although annuities are distributed by the financial planners of insurance companies, they are not qualified to be called insurance policies. The tax associated with an annuity is compounded and deferred until the withdrawals are made. Thus, annuities are useful tools for retirement planning that enable people to save money on a tax-deferred basis. Look out for the best annuity rates online or with guidance from your financial adviser.

 

Annuity as a US Financial Product

In the United States, an annuity is similar to an insurance product. Annuities are issued by the same companies that issue life insurance policies. Even the risk undertaken by the issuer of the contract is similar to that associated with life insurance products.

In an annuity contract, the life expectancy of the customer is betted upon. The contract transfers the uncertainty of an individual’s lifespan from the individual to the insurer. The issuer of the policy reduces its own uncertainty by pooling many clients.

Annuity in the United Kingdom

In the United Kingdom, the term annuity refers to a contract that makes payments. In this context, the means of savings is referred to as pension. It is compulsory in the United Kingdom to convert pension income into an annuity. This has resulted into a large market for annuities.

There are various kinds of annuities in the United Kingdom. They are also known as Compulsory Purchase Annuity. These include conventional annuities, with profit annuities and unit linked annuities. When the annuities are purchased from savings, they are known as Purchase Life Annuities.

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