Early annuities were simple contracts guaranteeing a return of principal and fixed rates of return from the insurance company during the accumulation phase. At withdrawal, the annuitant chose either a fixed income for life or payments over a specific number of years.

Buyers have always been drawn to annuities by their tax-deferred status. As a consequence of being issued by insurance companies, annuities have always been able to accumulate without taxes being taken out at year-end, which has added the time value of money to their list of advantages.

The most recent major development has been the inception, in 1952, of variable annuities, which offer the investment features of separate mutual fund accounts inside the annuity with the tax-deferral available from life insurance products. Variable annuity owners choose the type of accounts to use, often receiving modest guarantees from the issuer in exchange for the greater risks assumed.

"The shift to investment-linked annuities has been so marked that 25,000 investment-linked annuities were sold [in 2001] - 9.5 percent of all annuity business," reports Peter Quinton, Managing Director of The Annuity Bureau, adding that, "It's likely that the popularity of these annuities will continue to increase as they are the only at retirement products that offer retirees a half-way house between the two extremes of purchasing a safe conventional annuity and opting for an investment-linked income drawdown plan, where the cross-subsidy system does not apply."

Source: Pensions Management; 12/1/2002

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