An annuity is a long-term investment contract established between the annuitant (you) and an insurance company (the annuity issuer). This agreement involves providing after-tax funds to the annuity issuer, who then invests your principal, intending to meet your financial objectives. The issuer returns the accumulated earnings to you or your designated beneficiary, subject to their ability to fulfill claims.
In the case of a fixed annuity, the interest rate is guaranteed, ensuring predictability.
On the other hand, a variable annuity's earnings are linked to the performance of your chosen investments and can be higher or lower than your principal upon redemption. While variable annuities offer greater control over investment options, they also come with increased risk.
Annuities differ from other investment plans because there are no specific contribution limits. Your funds have the advantage of growing steadily on a tax-deferred basis, and you are only required to pay regular income tax on the earnings when you withdraw.
