Glossary

What is an annuity?

An annuity is a financial product designed to provide a consistent income stream, often used for retirement planning. Offered by insurance companies, it involves making a lump sum or periodic payments in exchange for regular disbursements, which can begin immediately or at a future date. These payouts can be scheduled for a specific period or the annuitant’s lifetime, helping manage the risk of outliving savings.

How do annuities work?

Annuities convert a financial investment into a predictable income stream. Individuals pay into an annuity—either in a single payment or installments—and, in return, receive scheduled payouts based on the terms of the contract. These payments can be fixed, variable, or indexed:

• Fixed annuities: Offer guaranteed, stable payouts, ideal for individuals seeking predictability.
• Variable annuities: Payments fluctuate with the performance of investment portfolios, offering higher growth potential but increased risk.
• Indexed annuities: Returns are tied to a market index (e.g., S&P 500), combining elements of fixed and variable annuities with some level of security.

Payouts can be immediate for near-term income needs or deferred, allowing for an accumulation period to grow funds before disbursement begins.

Annuities as part of employee benefits

Annuities can be included in retirement packages to enhance financial security for employees. Employers may offer annuity options through 401(k) plans or standalone benefits. These instruments provide long-term stability and peace of mind by supplementing other retirement income sources, such as pensions or Social Security. Customizable features like inflation adjustments or death benefits allow employees to align annuities with their personal retirement strategies.

Considerations for global workforces

For businesses with international teams, annuities present unique challenges and opportunities:

• Compliance and regulation: Employers must adhere to diverse legal and tax frameworks across countries, ensuring transparency and fairness.
• Currency risks: Fluctuating exchange rates can impact the value of annuity payouts for employees in different regions, requiring strategies to mitigate these effects.
• Cultural preferences: Financial products must align with local expectations and norms to maximize employee engagement.

Potential risks of annuities

While annuities provide reliable income, they come with risks for both employers and employees:

• For employers: Administering annuity benefits can be complex and costly, particularly for global teams navigating varied regulatory environments.
• For employees: Risks include low returns on variable annuities, loss of liquidity due to early withdrawal penalties, and the reliance on the insurer’s financial stability.

Key takeaways

Annuities are a valuable tool for financial planning, offering security and stability for individuals and a competitive edge for employers in designing benefits packages. However, their complexity and potential costs necessitate careful evaluation. Employers should work with legal and financial advisors to structure annuity offerings effectively, while employees are encouraged to consult advisors to ensure annuities align with their retirement goals and risk tolerance.