Definition
Annuity
An annuity is a financial product that pays a regular income stream, typically for life, in exchange for a lump sum — used mainly to secure income in retirement.
By converting a corpus into guaranteed periodic payments, an annuity pools longevity risk across many people, ensuring you do not outlive that portion of your income. Variants include immediate annuities (income starts at once) and deferred ones, and options that continue payments to a spouse or return the purchase price to heirs, each affecting the payout.
Annuities trade growth and flexibility for certainty: the income is dependable but often modest, and the capital is usually locked in. In India, a portion of NPS maturity must be annuitised. They suit retirees who value guaranteed lifelong income to cover essential expenses, ideally alongside growth assets for the rest.
Related terms
- Retirement CorpusA retirement corpus is the total lump sum you need to have accumulated by retirement to fund your living expenses for the rest of your life.
- Longevity RiskLongevity risk is the risk of outliving your savings — that you live longer than your retirement corpus was designed to support.
- Annuity Due vs Ordinary AnnuityAn ordinary annuity pays at the end of each period, while an annuity due pays at the beginning — a timing difference that changes its value.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.