Annuity

An annuity is a series of fixed payments made at regular intervals. This payment stream is the result of an agreement under which the recipient originally paid a sum to a financial institution (such as an insurer), with the institution pledging to return the funds at a later date, plus interest. The payment phase during which the investment fund is built up is called the accumulation phase, while the payment phase during which annuity payments are made is called the annuitization phase. A fixed stream of annuity payments is called a fixed annuity. A stream of payments in which the payments can vary based on the success of the underlying investments is called a variable annuity.

Annuity contracts are commonly used by retirees, who want a long-term income stream and deferred taxable income. The risk they bear is that the annuities may not begin to pay back for a long period of time. Also, annuities can involve fairly large salesperson commissions. Examples of annuities are social security and defined benefit pension plans.