- If you own equities, or stocks, you have a share of ownership in a public corporation. This entitles you to a fractional share of any future dividends the company distributes. Your shares also entitle you to vote for members of the company's board of directors. When stock prices rise, you can sell your shares or keep them in anticipation of future dividends or price increases. There are no guarantees against loss, however, and you can lose some or all of what you invest in any given company. You can own equities directly or through mutual funds.
- An annuity is an arrangement between an investor and an insurance company in which the investor gives money, or a premium, to an insurance company. In return, the insurance company agrees to pay the investor a stream of income, commencing either now (immediate annuities) or at some date in the future (deferred annuities). The primary purpose of the annuity contract is to provide an income later in life. Annuities may offer a guaranteed investment return (in the case of fixed annuities), or let the market determine eventual returns. These are known as variable annuities.
- The investor does not own assets such as equities directly. Instead, he owns a claim against the general fund of the insurance company. This allows the insurance company to provide a number of guarantees and hedge a number of risks for the investor. For example, the insurance company could issue a rider that guarantees the annuity owner that he will still receive a guaranteed minimum rate of growth even if investment values should collapse. Annuities frequently provide a minimum death benefit as well. If a customer buys a variable annuity and dies with a lower balance than he invested, the insurance company often guarantees heirs that the minimum amount they will inherit will be at least the amount the investor had contributed, regardless of market returns. Annuities frequently have high fees compared with mutual funds, however, partially as a result of these guarantees.
- Annuities offer tax-deferred growth. Withdrawals in retirement are taxed as income, although the amount you have invested with your own money is gradually returned to you tax-free over the life of the annuity. You can roll balances from one annuity to another using Section 1035 of the United States Tax Code without any tax liabilty whatsoever. Annuity companies can guarantee customers a guaranteed minimum paycheck for life, no matter how long the annuitant lives, eliminating the risk that an investor will outlive her retirement nest egg. Many jurisdictions provide annuities' substantial protection against the claims of creditors. A mutual fund or portfolio of stocks outside of a retirement account may be more vulnerable to judgments.
- Annuities generally have higher annual fees than comparable mutual funds or a portfolio of equities, which ultimately depresses returns. Annuity withdrawals attributable to gains also are taxed as ordinary income, which may be less favorable than long-term capital gains rates. Annuities also generally come with surrender charges. These are essentially penalties for early withdrawals during the early years of the contract.
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