The History of Annuities
In 1653, a Neapolitan banker named Lorenzo Tonti developed a method for raising money in France called the tontine. Under this arrangement, subscribers purchased shares in exchange for income generated from the capital investment. As shareholders died off, their income was spread among the surviving partners until the last person alive collected all the benefits. The use of tontines spread to Britain and the United States where governments used them to finance public works projects. However, the practice was eventually banned because it created an incentive for shareholders to bump off their partners in exchange for a greater payout.
The tontine was an early predecessor to two of today’s most popular retirement vehicles: the deferred annuity and the immediate annuity. Of course, other investors no longer have a stake in your annuity income, but all annuities share three basic benefits that can potentially help you reach your retirement goals.
Annuity Basics to Remember
Before making a purchase, be aware that the guarantees of fixed annuity contracts are contingent on the claims-paying ability of the issuing insurance company. Annuity withdrawals are taxed as ordinary income and may be subject to surrender charges plus a 10 percent federal income tax penalty if made prior to age 59½. Most annuities have surrender charges that are assessed during the early years of the contract if the contract owner surrenders the annuity. Generally, variable annuities contain mortality and expense charges, account fees, investment management fees, and administrative fees. Variable annuity sub-accounts fluctuate with changes in market conditions, and when surrendered, the value may be more or less than the original amount invested. Variable annuities are long-term investment vehicles designed for retirement purposes. They are sold by prospectus only. Be sure to read the prospectus carefully before deciding whether to invest.