This week we are covering ‘Annuities’. We’ll break down that they are and what they are used for.
What is an ‘annuity’?
An annuity is a financial product that is designed to accept, then grow your money. Once the annuity term is completed you will receive a stream of money in steady payments. They were designed to be a means of having a steady cash flow once you have retired.
Annuities can also be used to turn a substantial lump sum of money into smaller, more manageable cash flows. This is usually used for winners of large cash settlements or large lottery payments.
What types of annuities are there?
Annuities can be structured in a variety of ways which includes many different details and factors, but they all feature the basics of the duration of the payment and then the duration of the pay out.
Annuities will either be fixed or variable – meaning that if you have a fixed annuity you will receive regular, set payments. If you have a variable annuity you have a greater chance of making larger gains and therefore receive larger payouts, however there is a chance that you could also receive smaller payouts if the investments do poorly.
Annuities are sold by various companies but the most popular are life insurance or investment funds.
So who buys them?
Annuities are usually bought by individuals who are looking for a stable and guaranteed retirement income.
In the case of immediate annuities, people who have received a large cash lump sum use an annuity to convert their large cash deposit into a smaller managed cash flow, which is useful in avoiding the ‘lottery winners curse’.