Annuities can be best defined as a type of investment that gives fixed amount of returns or income annually. This stream of payment may be for lifetime, or for shorter term. Likewise, regular debt payments towards home mortgage loans, insurances, or recurring deposits etc. also qualify as investment in annuities, even though the returns from these investments may or may not be fixed.

Conventionally, annuities carried fixed interest rates. However, innovative products have been introduced over the years. Therefore, now, there are annuities that carry variable rate of interest, and annuities that are linked to equities as well. Securities and Exchange Commission monitors the annuities that carry variable rate of interest, or are linked to equities.

Annuity investments form an important component of any retirement planning. They become reliable source of income every month at retirement. This helps to keep retirees away from financial worries. Retired people tend to worry more about their finances, and health at retirement. Worrying about finances leads to more health problems, and more health problems lead to more financial problems. Therefore, a regular source of income is what people would want at that point of time. However, there are not many reliable annuity sources. Some offer much higher returns, and are proportionately more risky as well. Those that offer lesser returns, require larger investment. Generally, government departments offer the annuities with lesser returns. Because of government backing, they are also more secure type of investments.

But the biggest problem with annuities is that inflation corrodes the value of returns from them. Effectively, returns from any annuity would not be sufficient after a few years, even though such returns are sufficient initially. If the individual plans to save more considering the future requirements, chances are that he or she would never manage to save enough. Moreover, income from annuities generated before retirement and during the initial stages of retirement would get added to the taxable income, and the individual would be paying tax on this as well. Effectively, depending exclusively on annuities at retirement implies saving more monies, which is often not feasible. Ideally, annuities should be periodically supplemented with additional annuities. In other words, some funds need to be parked in investments that fetch much higher returns such as investments in stocks, or mutual fund units. These can then be periodically liquidated and new annuities may be bought with them.

Annuities can be compared and valued based on their net present values. For this, future returns from the annuity are discounted at anticipated inflation rates, and brought to present values. These present values are used to compare different annuities, and determine their values.