What Is an Annuity for My Child?

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Annuities can help you save up for your child's financial needs.
Annuities can help you save up for your child's financial needs. (Image: Comstock Images/Comstock/Getty Images)

An annuity refers to a series of regular payments, whether you are the person making the payment or the receiver. You can use an annuity as part of your child's financial plan, for example, to make payments for his savings or to distribute your money in regular payments he receives over time.

College Annuity

You can use an annuity to save up for your child's education funds. To do so, you can set up an annuity in your child's name and contribute money regularly to the account over the years. When the time comes for your child to enter college, he can withdraw the money. An annuity allows the money to grow tax-free until the child withdraws it. At withdrawal, your child may have to pay taxes.

Gift Annuity

You can set up an annuity to provide a monetary gift for your child. The annuity does not need a specific purpose. You contribute money regularly to the account, and when your child reaches a certain age, he can withdraw the money from the annuity either as a lump sum or as a series of payments. Your child can use the money for any purpose, so it presents a danger if your child is not financially savvy.

Reversionary Annuity

A reversionary annuity provides a stream of income for your child beginning at the time you die. In this plan, you request a smaller annuity amount for yourself so that you receive only a portion of the stream of income to which you are entitled. The institution that manages the annuity then saves the remainder and starts making regular payments to your child when you die.

Pension Annuity

You can set up an annuity to provide funds for your child when he retires. This may be a part of your own pension annuity, which provides payments in your retirement. The institution that manages the annuity then separates the funds in the account into two, so it makes payments to you when you retire and to your child when he retires. Because this annuity pays only upon your child reaching a certain age, he can't spend it before he retires.

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