Annuity is essentially a series of fixed payments required from you or paid to you at a specified frequency over the course of a fixed time period.
What is an ‘Annuity’?
An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals and then, upon annuitization, issue a stream of payments at a later point in time. The period of time when an annuity is being funded and before payouts begin is referred to as the accumulation phase. Once payments commence, the contract is in the annuitization phase.
The most common payment frequencies are yearly, semi-annually (twice a year), quarterly and monthly. There are two basic types of annuity: ordinary annuity and annuity due.
Ordinary Annuity: Payments are required at the end of each period. For example, straight bonds usually pay coupon payments at the end of every six months until the bond’s maturity date.
Annuity Due: Payments are required at the beginning of each period. Rent is an example of annuity due. You are usually required to pay rent when you first move in at the beginning of the month, and then on the first of each month thereafter.