Most people shopping for an annuity are looking for a way to save for a childs college fund, or for a future retirement. Annuities are either deferred or immediate. Immediate annuities require a lump sum investment and start paying out on the following month, while a deferred annuity requires a monthly investment over a fixed period which will then start paying out at some fixed date in the future. If you are looking for a way to save money for retirement or a college fund, a deferred annuity is the type of annuity you need, and are the most popular type of annuity. If youre setting up a trust fund for someone in order to give them an immediate income, youd choose an immediate annuity.

When evaluating annuities there are a few things to consider.

• What, if any, are the tax advantages and liabilities of investing in different annuities?
  
• How are the payments from the annuity taxed?
  
• Is the annuity fixed or variable?
  
• What, if any, are the sales fees, maintenance fees, or load fees associated with the annuity?
  
• Is there a surrender charge, and what is the surrender charge period? Is the surrender charge waived in the event of a premature death or annuitization?
  

In considering tax advantages of investing in different annuities youll need to find out whether the investments into the annuity are tax-deductible or non-tax-deductible. Retirement plan annuities are usually tax-deductible, but the question should be asked and answered when youre evaluating annuities. Tax liabilities should also be weighed.

When evaluating how the payments from an annuity will be taxed, youll need to know that the tax rate will depend on the origin of the funds. Payments from annuities paid for by tax-deductible contributions will be taxed at payment at the recipients current income tax rate. If the annuity was a non-tax-deductible annuity, then when payments are made only the portion which is an investment gain will be taxed at the recipients current income tax rate. Also, depending on the individual recipients entire financial picture, it is sometimes more advantageous to have recipient payments carry a lesser tax load than payments made into the annuity.

If the person receiving the payment is less than the age of 59.5 or over 70.5, there are penalty taxes which may kick in, and should be discussed thoroughly with your accountant, tax specialist or financial advisor prior to making a decision about which annuity to choose. The industry sometimes uses the terms qualified or non-qualified to refer to whether funds paid into an annuity are tax-deductible.

The difference between a fixed annuity and a variable annuity is in how the payment to the recipient is structured. There are also some differences between fixed and variable annuities in how interest is compounded on the payments made into the annuity.

A fixed annuity will make payments of a fixed amount to the payment recipient for the term of the contract, usually until the death of the payment recipient, with the insurance company guaranteeing both the principle and the earnings. A variable annuity guarantees a minimum payment to the payment recipient, with the remainder above the minimum payment varying depending on the performance of the managed portfolio.

Each financial situation is different, and the help of a financial advisor in evaluating different annuities is advised. There are websites which can help you in the evaluation, but the decision is one that needs more expertise than most average people possess, due to the tax and estate ramifications both during the investment phase and the payment phase of an annuity.