An annuity is a contract between an investor and financial institution that guarantees a future stream of payments to the investor. They are commonly used by retirees as a source of reliable investment income.

You can purchase an annuity, most often issued by insurance companies, with monthly payments or a lump sum. From there, the issuing company will invest your money, hoping to realize a return that exceeds what it has agreed to pay you. At a specified date, you’ll begin to receive regular payments that can last for a set number of years or for the remainder of your life, depending on the type of annuity you purchased.

There are many kinds of annuities, including fixed, variable, immediate, and deferred. Each has distinct characteristics regarding investor cost and risk tolerance and the length of the payout schedule. Annuities are complex investments with potentially significant fees. Obtain guidance from an investment advisor and a tax advisor before purchasing an annuity.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.