What is Annuity?

An annuity is an insurance contract in which the buyer pays a premium (lump sum or instalments) and the insurer pays a series of guaranteed periodic payments — for a fixed period or for life — typically used for retirement income.

Two broad types: immediate annuities (pay-outs start within a year of purchase) and deferred annuities (accumulation phase before pay-out). Subtypes include fixed (guaranteed return), variable (returns tied to underlying investments) and indexed (linked to a market index with caps and floors).

Annuities trade flexibility for longevity protection: you cannot outlive a life annuity, but you also cannot reclaim the principal once annuitised. Best for retirees worried about longevity risk; less attractive when fees are high or interest rates low.

Example

A 65-year-old uses CHF 500,000 to buy an immediate life annuity paying CHF 2,400/month for life; total payments depend on how long they live.

Related terms

Retirement Planning

Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve them — covering savings, investments, insurance, taxes and withdrawal strategy.

Roth IRA

A Roth IRA is a US individual retirement account funded with after-tax dollars, in which contributions and earnings grow tax-free and qualified withdrawals in retirement are entirely tax-free.

401(k)

A 401(k) is a US employer-sponsored retirement account that lets employees contribute a portion of pre-tax (Traditional) or after-tax (Roth) salary, typically with an employer matching contribution, growing tax-deferred or tax-free until retirement.

Social Security

Social Security in the US (AHV/AVS in Switzerland, NI in the UK) is a government-run social-insurance programme that provides retirement, disability and survivor benefits to qualifying workers and their families, funded through payroll taxes.

Frequently asked questions

Should I buy an annuity?+

Useful for longevity protection; compare carefully with simple bond + equity drawdown plans, factoring in fees.

What happens when I die?+

Depends on the rider. Single-life: payments stop. Joint-life: spouse continues. Period certain: payments continue to heirs for a set time.

Are annuity payments taxable?+

Partially — the portion representing return of principal is tax-free; investment growth is taxable as income.