Glossary

Annuity

Also called pension plan, immediate annuity.

A contract that converts a lump sum into an income, paid for life or for a set period.

An annuity takes a lump sum and turns it into a stream of payments. Its purpose is to remove longevity risk — the risk of outliving your savings — by transferring it to the insurer, which pays for as long as you live.

The trade is that the decision is largely irreversible: once a corpus has been converted into an income, it generally cannot be converted back.

Related terms

  • Deferred annuity An annuity where payments begin at a chosen future date rather than immediately.
  • Longevity risk The risk of outliving your savings.
  • Vesting The date a deferred pension converts from accumulation into income.

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