What is an annuity?

An annuity is a contract between usually an insurane company and a client in which the company promises to make periodic payments to you, starting immediately or at some future time. You buy an annuity either with a single payment or a series of payments called premiums. Some annuity contracts provide a way to save for retirement. Others can turn your existing savings into a stream of retirement income. Still others do both. One example of annuity is a defined pension plan. Although most have been replaced by the 401k or IRAs, Defined pension plans provide a guaranteed regular income after retirement, usually based on a formula using salary and years of service.