The basic annuity definition is a series of equal payments made at regular intervals, such as every month or every year. In personal finance the word usually means a contract with an insurance company: you hand over money, either all at once or over time, and in return the insurer promises to pay you an income, often for the rest of your life.
To define annuity fully, note that the word has a general meaning used in maths and accounting, and a product meaning used in retirement planning. Both rest on the same idea of steady, scheduled payments. This page explains each one, the common types, and a simple example of the numbers.
Entry at a glance
Meaning
A fixed sum paid at regular intervals; also a contract that provides itPart of speech
Noun (plural annuities)Pronunciation
uh-NOO-uh-tee (US), uh-NYOO-ih-tee (UK)Related words
annuitant (the person paid), annuitize, annualOrigin
Old French annuité or Medieval Latin annuitas, from Latin annus, year; in English from the early 1400sField
Finance, insurance, accountingRegister
Formal and technical
What the word means
- A regular payment. In the oldest and widest sense, an annuity is any fixed amount paid at set times. A family trust that sends a relative the same sum every year is paying an annuity.
- A financial product. Today the word most often names a contract sold by a life insurer. You pay a premium, and the insurer pays you back as a stream of income. Many people buy one to turn savings into a pension they cannot outlive.
- A maths term. In finance classes, an annuity is any series of equal cash flows at equal gaps of time. Loan instalments and rent can both be treated as annuities when working out their present value.
How an annuity works in practice
A retirement annuity has two possible phases. In the accumulation phase, you pay money in and it may grow. In the payout phase, the insurer sends you income. Some contracts skip the first phase and start paying almost at once.
The trade is plain: steady, predictable income in exchange for giving up control of a lump sum. The payout amount depends on things like the sum invested, your age, interest rates and whether payments continue to a spouse after your death.
Common types of annuity
| Type | What it means |
|---|---|
| Immediate | Payments begin soon after you pay the premium |
| Deferred | Payments begin at a later date, for example at retirement |
| Fixed | The insurer promises a set rate or payment amount |
| Variable | Payments rise or fall with the investments chosen inside the contract |
| Life annuity | Pays for as long as the annuitant lives |
| Annuity certain | Pays for a fixed number of years, whether or not the annuitant is alive |
| Joint life | Keeps paying while either of two people, often a couple, is alive |
Real products often mix these features, and the names used by insurers vary between countries.
Annuity definition in accounting: ordinary vs due
Accountants and finance students split annuities by when each payment falls.
- Ordinary annuity: each payment is made at the end of the period. Most loan repayments and bond coupons follow this pattern.
- Annuity due: each payment is made at the start of the period. Rent paid on the first of each month is a common example.
Picture three payments of 1,000 each. If they arrive at the end of years one, two and three, that is an ordinary annuity. If they arrive at the start of each year instead, the series is an annuity due, and because every payment comes one period sooner, it is worth a little more in present value terms. That difference is the reason textbooks treat the two separately.
Where annuity comes from
Records of annuity in English go back to the early 1400s, when it meant a yearly allowance or grant. It came through Anglo-French and Old French annuité, or straight from Medieval Latin annuitas, and goes back to Latin annus, year. The sense of an investment that pays equal yearly amounts is recorded from the 1690s. Today payments are often monthly, but the yearly root survives in related words such as annual and anniversary.
Using the word correctly
Annuity is a countable noun: an annuity, two annuities. Typical phrases include buy an annuity, annuity income, annuity rates, annuity payments and a lifetime annuity. The person who receives the money is the annuitant, and to annuitize savings is to convert them into a stream of payments.
Do not confuse annuity with annual. Annual means once a year; an annuity can pay monthly, quarterly or yearly. It is also not the same as a stipend, which is a fixed allowance paid for study or service rather than bought as an investment. To see how insurers and banks fit into the bigger picture, our business and money section groups related terms, including portfolio and inflation, which can shrink the real value of a fixed payout over time.
Frequently asked questions
What is the annuity meaning in simple words?
An annuity is a deal where you give money to an insurer and it pays you back as regular income, often every month. More generally, the word means any series of equal payments made at regular times.
Is an annuity a good idea?
It depends on your situation. An annuity can give steady income and protect against living longer than your savings last, but it may have fees, limited access to your money and payments that lose value to rising prices. A qualified adviser can help you weigh this for your circumstances.
Is a pension the same thing as an annuity?
A pension is a retirement plan or the income it provides. An annuity is one way to turn a pension pot or other savings into income. In some plans, buying an annuity is how the pension is paid out.
How do you pronounce annuity?
Most Americans say uh-NOO-uh-tee. British speakers often say uh-NYOO-ih-tee. Either way, the second syllable carries the weight.
What happens to an annuity when the owner dies?
That depends on the contract. A plain life annuity usually stops. A joint life annuity keeps paying a surviving partner, and some contracts return part of the money to a named beneficiary or pay for a guaranteed minimum period.
What is the plural of annuity?
The plural is annuities. For example, a retiree might hold two annuities from different insurers.