In simple terms, an annuity is a contract between you and an insurance company. You have the option of making a single payment into the annuity, or you can deposit your money over time through a series of payments. The insurance company then provides you with a fixed payment each month. The payments to you can begin immediately or they can be deferred until a later date, depending on the terms you choose. In most cases, annuities provide you with tax-deferred earnings and a death benefit.

A lump-sum of money can be invested into a retirement annuity using income you may receive from fixed deposits or benefits from work. You would make a one-time payment with these benefits into the annuity. In this way, after a few months, you would begin receiving immediate income upon retirement.

Annuities are an excellent choice for retirement planning. During your working life, you can pay a small amount every month to the insurance company. Over a period of years, this can build up into a healthy amount in your account. Depending on the type of account you have chosen, fixed or variable, your money will be earning interest or may be invested in various equity markets or mutual funds.

Upon retirement, the insurance company starts paying you from your annuity. You may recieve these payments for a set amount of time, 20 years, for example, or they may continue for the rest of your life. These payments may either be fixed, if you have chosen a fixed annuity, or if you have chosen a variable scheme, the payments will depend on the activity of your investments.

On the other hand, an indexed annuity follows any changes in one of several well-known equity indexes. The annuity's return is based on any changes in the index on which it is based. In most cases, you are guaranteed a minimum return. Because of these characteristics, equity-indexed annuities combine the best features of a fixed-return traditional annuity product and the equity market.

Both variable annuities and securities work in a similar fashion, and are regulated by the SEC. However, fixed annuities work differently and are not. An indexed annuity contains features of both insurance and securities, so depending on the combination, it may or may not be treated as a security. However, the SEC does not usually regulate them.