Many people like to invest their retirement package in an insurance company, on the condition that their money is paid to them back on a regular basis. They `buy’ this arrangement, known as an `Annuity,’ from the insurance company. By going in for an annuity, the investor is assured of a regular income through retirement, or thereafter to his heirs. But this income, usually monthly, is based on the payment option that he chooses.

Though an annuity offers a regular monthly income to the investor, it cannot meet his immediate financial needs, like buying a home. In such circumstances people think, “Which is better, receiving a large amount of money today after paying taxes, or receiving an annuity as monthly payments for many years and paying taxes each year?” Let’s sort the dilemma out by considering an example as follows.

James wins $1 million in a lottery. The lottery company asks him to choose from the two options: a lump sum payment once, or annual payments of $75,000 for 30 years. Let the rate of income tax be 30%. If he chooses the first, his after-tax amount is $700,000. If he chooses the second, receiving $75,000 every year for 30 years, its income is far less considering inflation, tax and other unpredictable factors for the 30 years period. Obviously, the first option is better.

Accredited banks, insurance firms and finance companies and their websites have ready online annuity calculators to help investors make a good choice.