Annuity

The term annuity (from Latin annus, a year), in current use in the insurance industry, refers to two very different types of legal contracts with very different purposes. Traditionally, for at least four hundred years, the term annuity referred to what is more correctly called today an immediate annuity. This is an insurance policy which makes a series of either level or fluctuating periodical payments, made annually, or at more frequent intervals, either for a fixed term of years, or during the continuance of a given life, or a combination of lives. The overarching characteristic of the immediate annuity is that it is a vehicle for distributing savings. A common use for an immediate annuity might be to provide a pension income to a person who is about to retire.

Taxation

In the USA tax code, the growth of the premium during the accumulation phase is not subject to current income tax. This is referred to as being tax deferred. Perhaps the tax deferred status of deferred annuities has led to their common usage in the United States. Under the US tax code, the benefits from annuity contracts do not always have to be taken in the form of a fixed stream of payments (annuitization), and many of the contracts are bought primarily for the tax benefits rather than to get a fixed stream of income.

Related Topics:
USA - Tax - Income tax

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In the United Kingdom, the income from Compulsory Purchase Annuties purchased with pension funds or by an employer immediately on retirement (a Hancock annuity) is treated as taxable income. The income from Purchased Life Annuities, bought by any other means, has an element which is considered return of capital, and only the excess over this is considered a gain that is subject to income tax. The element considered capital return is based on life expectancy and will therefore increase with age.

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