annuity

Contract where a lump sum is used to purchase regular income, usually made with an insurance company.

The amount of income paid depends on the annuity rates at the time the annuity is purchased. Annuity rates depend on factors such as the prevailing interest rates. The company paying the annuity retains the lump sum after the person purchasing the annuity dies, in return providing a fixed and regular payment for the duration of the purchaser's life. Annuities are a common method of paying pensions. Upon retirement an individual might purchase an annuity with a lump sum accumulated in their pension fund. The annuity may be deferred; when using an annuity for pension income this means the recipient need not convert the lump sum into an annuity immediately upon retirement, instead allowing them to wait for the most favourable market conditions.