Why People Buy Annuities

Many people buy annuities to give them retirement income for the rest of their lives. An annuity contract can also be a safe means of building assets for other purposes with a more limited time span.

An annuity has tax advantages. In a deferred annuity, the interest credited to your account builds up free of current income tax. You pay no tax until you get the annuity's benefits. But, if you withdraw the accumulated value of annuity contract before retirement age, there can be significant tax penalties and current taxes that may have to be paid.

Annuities can be used to fund an Individual Retirement Account. They also may be used in Keogh-type retirement plans for the self-employed.

Who should consider purchasing an annuity? In addition to companies that buy group annuities to fund their pension plans, the list is long. It includes many people who purchase annuities because they do not belong to retirement plans or because they want to supplement their pensions. The list may also include a person who has sold his or her business, a couple that has sold its home, a widow or divorcee who needs the most income possible, but wants safety in terms of monthly payments, a grandparent who wants to provide for grandchildren or someone who has had a big income for one or two years but who can't be certain about the future.