An income annuity is a very useful tool to create a guaranteed income stream. The period of time that you will receive the income for can be selected by the annuitant. For example, it can be an income stream that is guaranteed for the lifetime of the annuitant or for a period certain. There are also the ability to allow the surviving spouse to continue to receive the payments after the death of the annuitant. Annuities are great tools when a client needs to guarantee income to themselves and/or a spouse. Defined benefit pension plans are an annuity. They guarantee a retiree a certain amount of money annually in retirement.
The two types of annuities are immediate annuities and tax-deferred annuities. Immediate annuities are designed to create the immediate income that we are talking about above. The tax deferred annuities are built for building tax-deferred growth. In many cases is using both of these types of annuities at the same time. An example of this is for a client who has a defined amount of income that they need for a period of time and has a lump sum to invest. A portion of the money might be put in the immediate annuity for a period certain (10 years) and they other portion put in a deferred annuity. The goal would be to deliver the necessary income over that period of time and try to build the amount of the deferred annuity back to the original lump sum at that the end of the 10 years.