A History of Annuities

Annuities in Rome

Many people today make use of annuity as for retirement, but it is not a new instrument. Back during the time of the Roman Empire, citizens could obtain what was known as an annual stipend, or annua. In exchange for a one-time disbursement to the annua, the citizen would get a payment back every year for the rest of their lives. This practice continued to evolve over time.

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Annuities Post-Renaissance

By the 1600’s, much of Europe was in the throws of near constant warfare; the Thirty Years’ War would start between Protestants and Catholics in the Holy Roman Empire, and spread from there to gradually envelop most of the continent. City-states and nations were desperate for funds, and they used a form of annuity to raise money for defensive or offensive operations. They used what was known as a tontine, which means promise or pledge, as a fundraiser. Like the annua, people would contribute money to a general found, and in exchange they’d get a smaller sum back each year for a set number of years.

The Tontine

One of the first of these was the State Tontine of 1693, established in England. The process was simple: a person could buy a share in the Tontine, and then they would get an annual payment from the fund for the lifetime of a specific person. In the modern annuity, a person gets one for themselves, but these English Tontines were different. The person buying the share could designate a different person as what was known as the nominee for the Tontine. Normally, they would select a young child, hoping to make the lifespan of the annuity as long as possible. As the nominees passed away, the remaining ones would get a larger share of the annual payment; until the last one died. This eventually evolved into a system whereby the share owners could pass their share(s) on to a beneficiary in their will.

Annuities in the U.S.

In the United States, the first annuities appeared in the mid 18th century. Initially, its function was to help Presbyterian ministers and their families. Like other annuities, the ministers put money in the fund, and could then receive lifetime payments. Eventually, in the early part of the 20th century, average citizens could buy annuities without having to be part of a group. They truly hit their stride in the 1930’s, during the worst part of the Great Depression. People were suspicious of banks and stocks, yet still needed an income; during that era, more than ever! Insurance companies were seen as one of the few financial institutions that people could trust. In addition, the government, under President Roosevelt, had launched programs to encourage people to save. Annuities were seen as the perfect blending of both issues: they got people to save their money, and they were handled by insurance companies.

These annuities were quite simple: a promise to repay the principal, plus a fixed rate of return that built up over the accumulation period. You could get a set amount for the rest of your life, or specific payments for a set time. A key benefit to annuities was (and is) the fact their tax-deferment; taxes weren’t paid until the money was withdrawn.

Annuities Post-WWII

By the 1950’s, the feature of variable annuities was introduced; the first mutual funds. Now, people could spread their money across several accounts, depending on the degree of risk they were willing to accept. Eventually, other features were added: bonus rates, reduced time until maturity, death benefits, and even checkbooks.

Today they remain an excellent means of investing for the future, and insuring that you’ll have an income in your old age.
