Investopedia says: "An annuity is a contractual financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time ... Defined benefit pensions and Social Security are two examples of lifetime guaranteed annuities that pay retirees a steady cash flow until they pass."
The CFP explains:
"People tend to look at an annuity and think it's a bad thing. But if you go to somebody and ask them if they would like to have a pension, most people would have a positive reaction to that.
"The reasons that people have such negative feelings about them are, one, as an insurance product, they are a commissionable product. Very often people put too much of their money into an annuity and they lose the liquidity of just being invested normally in the market.
"The second thing people don't understand is the true lack of liquidity that comes with an annuity. If you're given these guarantees, if you have this guaranteed income stream that the insurance company is promising you, they require you to leave the money with them for an extended period of time. If you take your money out early, they're going to charge you a surrender charge.
"If it was properly explained and put in place within the context of a plan and not too much a portion of your assets, then very often annuities can be very beneficial pieces to a successful long-term financial plan."
Use it better: Don't balk at annuities straight away. Discuss with your adviser whether they can be a beneficial part of your long-term financial plan, and, if so, remember that they'll make a portion of your investable assets illiquid and inaccessible for a period of time.