What is Annuity and Its Types

An annuity is a financial arrangement that provides regular income, usually after retirement. It helps manage daily expenses when the salary stops. It's important because many people worry less about saving and more about how they will receive a steady income later in life. Annuities address this gap by turning long-term savings into predictable payouts, which can support routine costs, healthcare needs, and basic lifestyle without depending fully on market movements.  In this article, we explain what annuity is, how they work, and the different types available, so you can understand where they fit into long-term financial planning.

What is annuity?

An annuity is a contract between an individual and an insurance provider where a lump sum or periodic payments are made in exchange for regular income in the future. The income can start immediately or after a chosen period and may continue for a fixed number of years or for life. In simple terms, it converts savings into a structured income stream, making retirement planning more stable and easier to manage.

How does annuity work?

An annuity works in two stages. First is the accumulation stage, where money is invested either at once or over time. During this phase, the value may grow depending on the type of annuity selected. The second stage is the payout stage, when regular income begins. Payments can be monthly, quarterly, or yearly, based on preference. Many people include annuities as part of their broader retirement plan because it helps cover essential expenses while other investments remain available for long-term growth.

What are the different types of annuities?

Below are the different types of annuities.

• Immediate annuity: Income starts soon after investment, usually within a few months. It is useful for retirees who already have savings and want regular income without delay.
• Deferred annuity: Income begins at a future date. The invested amount grows during the waiting period, which may result in higher payouts later. This suits long-term retirement planning.
• Fixed annuity: Provides guaranteed returns and fixed income. The payout does not change, making budgeting easier and reducing exposure to market risks.
• Variable annuity: Returns depend on market-linked investments. Income may increase over time but can also vary, so it suits people who can bear some fluctuation.
• Indexed annuity: Returns are linked to a market index with limits on gains and protection against losses. It offers a middle path between fixed and variable options.

How do different types of annuities work?

Here's how different types of annuity plans work.

• Immediate annuity working: A lump sum is paid to the insurer, and income starts shortly after. The amount depends on age, investment size, and payout option selected.
• Deferred annuity working: Money grows during the deferment period through interest or market performance. Later, it is converted into regular income or withdrawn as needed.
• Fixed annuity working: The insurer credits a fixed return, and payouts remain constant. This helps cover routine expenses such as rent or medical bills.
• Variable annuity working: Funds are invested in chosen market-linked options. Payouts depend on portfolio value at the time income begins.
• Indexed annuity working Returns follow a market index within set limits. This allows participation in market growth while reducing downside risk.

Features of an annuity

The key features of an annuity plan include the following.

• Regular income: Provides steady cash flow at fixed intervals, supporting daily living costs during retirement and helping manage monthly budgets with less stress. This consistency is especially helpful when most other income sources stop after retirement.
• Flexible payout options Income can be for life, for a fixed term, or with return of purchase price, depending on preference. This allows people to plan income not just for themselves but also for family responsibilities if needed.
• Custom start date Deferred options allow income to begin when retirement actually starts, not before. This helps align income with actual life stages. It also gives more time for the invested amount to grow before payouts begin.
• Longer protection Lifetime payouts continue even if a person lives longer than expected, which becomes especially important as life expectancy increases. This removes the risk of running out of income in later years.
• Choice of payment frequency Policyholders can choose how often they receive income, such as monthly or yearly, making it easier to match regular expenses and commitments. This flexibility helps manage both daily bills and larger annual costs.
• Option to add riders: Some annuities allow additional features as riders³, such as spouse coverage or increasing income, which can improve long-term usefulness without changing the main structure. These options can be chosen based on personal and family needs.

Benefits of annuities

The advantages of purchasing an annuity plan are as follows.

• Predictable retirement income: Assists in maintaining stability in case of irregular salary payments. It helps manage necessary expenditures on housing, food, and medical care. Knowing how much income you can expect each month helps in making financial planning simpler.
• Minimising market dependence: Some annuities protect earnings against market fluctuations, an aspect that appeals to most retirees during uncertain economic times. This enables one to refrain from selling their investments when the market is volatile.
• Portfolio balancing: Apart from the basic income, other investments remain invested for growth rather than utilised for daily needs.
• Voluntary inflation adjustments:There are certain schemes that pay rising amounts to help manage with the rising cost of living. It helps in retaining purchasing power. It is particularly helpful in cases where the retirement life will be longer.
• Lower financial anxiety: Knowing that a fixed amount will arrive regularly often reduces stress and allows better planning for travel, family support, or medical needs. It also brings more confidence in managing long-term expenses.
• Useful for long retirements: For people who may spend 20 to 30 years in retirement, steady income plays a major role in keeping finances on track across changing life stages. It supports both routine needs and unexpected costs over time.

Who should buy an annuity plan?

The following individuals can consider buying an annuity plan.

• Near-retirees: Those approaching retirement who want to lock in steady income for future years.
• People without pensions: Useful for individuals who do not receive employer-funded retirement income.
• Conservative savers: Those who prefer stable returns rather than market-linked² volatility.
• Long-term planners: People who start early can use deferred annuities to build structured future income.

When is the right time to buy an annuity plan?

There is no right age. Typically, annuities should be considered once retirement is near, as income requirements become more defined. Deferred options are suitable for early planners, whereas immediate annuities are suited for someone who may already be in need of income. One can pair their annuity plans with other savings tools, thereby leaving room for financial flexibility.

Conclusion

Annuities can help to ensure savings are turned into a stable income stream; this can be important for covering daily expenses even in retirement. Since they come in various forms and can be chosen depending on risk or savings timelines, annuities are beneficial for various savings objectives. When planned for and combined with other savings strategies, they may ensure income certainty and allow for proper savings planning.