When you purchase an annuity you enter into a contract with an insurance company and make either one payment or payments in a series. They agree to return to you a fixed amount of money, either immediately, or after some agreed period of time. Usually, annuities allow you to create earnings that are tax deferred. Many include a death benefit.

A lump-sum of money can be invested into a retirement annuity using income you may receive from fixed deposits or benefits from work. You would make a one-time payment with these benefits into the annuity. In this way, after a few months, you would begin receiving immediate income upon retirement.

Annuities are a good tool available to you in your retirement planning. Throughout your working years, you are able to deposit a nominal amount into the annuity each month. Throughout the years, these deposits can add up to a large amount of money. Depending on whether you picked a fixed or variable scheme when you opened the account, your money will earn interest or it will be invested in the equity markets or mutual funds.

When you retire, your insurance company starts to pay you back. Depending on what type of scheme you had chosen, it may be for a fixed period of time, like 20 years for example, or for your lifetime. There are two basic types of annuities, either fixed or variable. In a fixed annuity, the payments are fixed while in the variable scheme your periodic payments will depend on the performance of your investments.

On the other hand, an indexed annuity follows any changes in one of several well-known equity indexes. The annuity’s return is based on any changes in the index on which it is based. In most cases, you are guaranteed a minimum return. Because of these characteristics, equity-indexed annuities combine the best features of a fixed-return traditional annuity product and the equity market.

Both variable annuities and securities work in a similar fashion, and are regulated by the SEC. However, fixed annuities work differently and are not. An indexed annuity contains features of both insurance and securities, so depending on the combination, it may or may not be treated as a security. However, the SEC does not usually regulate them.

- Kenneth Nuss