Investment Dictionary

Annuity

There are two types of annuities:The first is when you pay a lump sum to a life insurance company, and they pay it out to you right away in periodic installments. This type is known as an immediate annuity – the payments to you start immediately. The second, and more common, is where money paid by you accumulates at interest over a period of time. If you choose, the accumulated amounts will then be paid out to you in periodic installments, usually when you retire, in order to supplement your retirement income. This type is known as a deferred annuity – the payments to you are deferred for a number of years. Currently, a deferred annuity may have tax advantages, in that the interest credited to your funds is deferred from current taxation. That is to say, income tax is not owed until you start receiving distributions from the annuity.

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