An annuity is a type of investment that pays you a guaranteed stream of income over a period of time. A major attraction of annuities is their certainty, when you purchase an annuity you know how much you will get and how often.
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Annuities are products that are purchased from providers such as super funds and insurance companies with a lump sum. Annuities pay out a monthly, quarterly, half yearly or yearly cash flow and the payment can be increased each year by a fixed percentage or indexed to inflation depending on the type of annuity you purchase. Sometimes annuity payments vary depending on the performance of the underlying assets.
Now that we’ve covered the basics of what an annuity is, let’s look at some of the ways that annuity products can differ.
Annuities are a common investment for pensioners and retirees as they are a guaranteed regular income stream. The consistency of annuities means that unlike other investment types annuities can be relied upon to not run out before you die (if you chose the “for life” option) and the regular nature of the payments allows for budgeting for years in the future.
Super funds and insurance companies are the main sellers of annuity products.
Annuities are locked in after being purchased which is both a pro and a con. On one hand, this means that they can be relied upon and people, especially pensioners need not worry about outliving the annuity (depending on the option chosen) but on the other hand it means that a large sum of money has been tied up into this investment product. There are often fees (usually decreasing over time) if you wish to get out of an annuity. Therefore, the illiquid nature of annuities can be both appealing and frustrating.