An annuity is a contract between an investor and an insurance company in which the investor make a lump sum payment or series of payments and in return obtain regular disbursements beginning either immediately or at some point in the future.  Annuities are chiefly used for retirement planning as growth is tax deferred until withdrawn.  Withdrawals prior to 59 ½ years old are subject to penalties.  

There are generally three types of annuities – fixed annuities, variable annuities and indexed annuities. 

Fixed annuities – the principal is guaranteed and grows at a fixed interest rate.  

Variable annuities – the invested capital goes into sub-accounts that are tied to the various sectors of the capital markets (stocks, bonds, etc.).  While variable annuities offer the possibility of greater returns, there is increased risk.

Indexed annuities – the performance of the investments within the annuity are directly tied to market indexes like the S&P 500.  

All of the above examples can be an immediate annuity or a deferred annuity.  As the name implies, an immediate annuity begins to make payments to the investor immediately.  On the other hand, the deferred annuity begins distributions after a period of time.  

Annuities can have a useful role in a financial plan but it is important to consider all of the nuances in order to make the best decisions.  Kerr Financial Group can help you in this process.