Definitions 
An annuity is a recurring payment, usually monthly or annually, that an organisation pays in return for a lump sum payment.
Annuities are often associated with pensions because of the ability continue to receive an income for life.
As with many financial products, annuities are a transfer of risk. Let us look several risks that you are able to transfer:
- Risk of living a long time: By purchasing an annuity for life, you are guaranteed to receive an income regardless of how long he lives. You have effectively transferred the risk that you will live a long time (and therefore required more money) to the financial organisation in question.
- Risk of lower interest rates: If you simply kept your money in a savings account, the amount of interest you receive would vary depending on the interest rate environment. By purchasing a annuity, you can be certain about the amount you will receive in the future.
- Risk of Inflation: As explained here, inflation means that any cash you hold is worth less over time. You are able to transfer the risk of inflation rising, by purchasing an annuity which is linked to inflation. You can therefore be certain that the amount you receive will be worth the same amount over time.
Of course, financial institutions do not accept these risks out of the goodness of their hearts! Annuity rates are set such that the financial provider will, on average, over time, make a profit on selling annuities.
