Question

Which of the following is a primary characteristic of an annuity?

1) Fixed payments over a specified period of time
2) Variable payments over a specified period of time
3) Lump sum payment at the end of a specified period of time
4) Lump sum payment at the beginning of a specified period of time

Answer 1

The main characteristic of an annuity is providing fixed payments over a set period, which provides a predictable income stream but may be affected by inflation.

Therefore, option 1 is correct

Step-by-step explanation:

The primary characteristic of an annuity is fixed payments over a specified period of time. This consistent income stream distinguishes annuities from other retirement savings options, such as stocks or bonds that can have variable returns. Pensions, a form of annuity often provided by private companies to retirees, are known as 'defined benefits' plans because they promise a fixed nominal dollar amount every year. Despite the security of fixed payments, annuities can pose a challenge during periods of inflation, as the purchasing power of these payments may decrease over time.