Originally, the word
annuity referred only to a lifelong payment
stream that was purchased for in one single, lump-sum payment to an
insurance company. Today, this arrangement is called an
immediate
annuity because there is no
accumulation period – the distributions
begin soon after the immediate annuity is purchased. (Distribution
payments may be made monthly, quarterly, semi-annually or annually; the
distribution pattern chosen determined when the first payment is made.)
The lump-sum purchase payment is invested. If the insurance company
controls the investment, the immediate annuity is “fixed.” If the
annuity holder controls it, the immediate annuity is “variable.”
Immediate
annuities are very useful for people who already have the money
necessary to provide for their lifetime stream of income. These
annuities combine well with employer retirement plans in which either
the employer or the employee can choose to invest a lump sum of savings
into an immediate annuity at retirement. Government retirement systems
in countries such as Chile have been privatized through the use of
immediate annuities. In the United Kingdom, employees are required to
purchase an annuity using the proceeds of lump-sum retirement payouts
no later than age 75.