An annuity is a word that is most commonly used among the insurance fraternity. Many of us may just have heard from a distance, but not given much thought into it. Others may only be interested in what the numbers are and not so much the wording. What seems to matter is, how much am I paying every month or year and how much am I going to get every month or year? And they are right because just like lawyers at times come up with long words that end up confusing one, insurance firms also tend to capitalize on certain technical words.
To keep it simple, annuity is the agreement between you and the insurance firm where you agree to pay some money which maybe a lump sum or paid in bites (periodically) and the insurance firm in return agree upon a certain thing happening they would pay some amount of money again maybe lump sum or in bites.

Mechanism
Basically how the annuities operate is that you would make regular payments, some like pensions have been made mandatory and the payments are deducted at source. When we say that payments are deducted at source it means that when you receive your salary you will receive it out of the pension contributions made. The obligation of collecting and submitting the pensions lies squarely with the employer who may also be required to make some contribution as well. Once you reach a certain age of maybe 60-70 and maybe depending on your gender, you start receiving a certain amount of money (pension) every month until you die. Some people sign-up to private pension schemes as well which is voluntary, but just works similar to the state pension funds available.

Comparisons
Because the annuities spread over many years some times up to 80 years plus, it is quite complex making comparison with sums paid today and to be received 50 years down the line. There are complex mathematical calculations that try to make that comparison with discounting techniques. Though at times many elderly people have worked throughout there lives some from age as young as 16 years to 70 years, but the pensions that they receive are hardly enough to sustain them.  Making many have to depend on relatives to sustain their quality of life. That is why at times it is better to have a private pension to provide additional income in the later days.

Types of annuities
We have fixed and variable annuities and as the names suggest is a predetermined set amount while the other is dependent on various factors. Fixed annuities generally attract a lower interest rate as compared with the variable annuities and the logics is that fixed bears a lower rate of risk while variable carries a much higher rate of risk.

Comparison
You would not be able to pin-point between the two which is better than the other one. Some people argue that variable annuities are as risky as their interest is dependent on the market performance indicators.

We all have different mind sets, with some having a risk adverse wanting to avoid anything risky while others are risk takers and take on risky projects, many of us are somewhere between- risk neutral, and carefully assess the pros and cons of each one option. The risk seeker would be inclined towards taking the variable annuities while the risk adverse would lean towards the fixed annuities.  

Easy calculations
For those that may want to avoid the lengthy mathematical calculations that annuities come with. There annuities calculators online where you just enter the amounts and the give the relevant answers. Much as this may sound easy, but you must have a basic understanding how the calculations are done to appreciate it. The idea of the calculations is that money you receive today would not be the same as money you receive 10 years from today, mainly because of inflation.

View points
Some people have argued that it is better to just save you money in the bank and access it when you want. But, you must remember that the rates that bank offers are very minimal; actually just enough to cover for the inflation rates. People don’t generally make money from the banks, it is just a good place that you can store your money and have easy access when you want it.

Annuities, unlike the bank savings, come with very many advantages -one is they do provide much higher interest rates, and the payments are exempted from tax. They would ultimately provide a guaranteed source of income in the later years.

Conclusion
It is important that before one makes an investment decision, that you seek professional advice or just ask for quotes and get a good idea what offers are on the table. The details of annuities may seem complex to some, but with the right approach and understanding, it becomes quite simple.