Types

• There are two types of annuities. An immediate annuity makes payments to you as soon as you give the insurance company a lump sum of money. A deferred annuity defers this payment until a time you choose in the future. These longer-term annuities defer immediate annuity payments for one year to 10 years or more.
  
  

Function

• Both types of annuities may be fixed or variable. Fixed annuities pay a fixed interest rate set by the insurance company. A variable annuity uses mutual funds to determine the interest credited to the annuity account. Annuities that defer payments to you also defer taxation of all of the interest earnings in the account until payments begin.
  
  

Significance

• The significance of an annuity as an investment is that you receive tax-deferred growth on the build-up of the annuity account value. This differs from many other kinds of investments in that most investments are taxable in the year that the investment earns interest. Additionally, the annuity offers a death benefit that may exceed the actual account balance, depending on the terms of the contract.
  
  

Benefits

• The benefit of using an annuity is that you can accumulate a larger retirement savings. You also don't have to worry about running out of money with an annuity once you elect to receive lifetime payments from your contract.
  
  

Considerations

• Consider whether you want an insurance company to manage your retirement account for you through a fixed annuity or whether you want to choose the investments yourself using a variable annuity. Also consider whether you want the security of lifetime payments or whether you think you can manage your retirement income yourself.