In general, annuities provide a way to save for retirement. Investors looking for a safe means of insuring a steady stream of income in retirement often buy annuities. A federal annuity is a similar product – but not available to the general public.
Definition of Annuity
The term "annuity" refers to a long-term financial instrument designed for retirement savings. Many annuities have tax advantages. The contributions are often tax-free.
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People invest in annuities mainly to save for retirement. Investors can buy annuities from a financial institution, usually an insurance company. The annuity allows the investor to contribute money and then receive a stream of payments at a later date. Annuity payments can be fixed or variable depending on the preference of the investor.
A federal annuity is a part of an employer-sponsored retirement plan. The structures differ slightly for employees in the CSRS (Civil Service Retirement System) or the FERS (Federal Employees Retirement System). In either case, federal employees contribute to their annuity while employed by the government, and the money is typically matched by the agency. The money accumulates over time and then is paid back to the employee after retirement each month for the rest of that employee's life.
How a Federal Annuity Works
When an employee retires from the federal government, he begins to receive annuity payments. This is very similar to receiving payments from a pension plan. The employee receives stable payments that are calculated based on years of service and average pay. Federal annuities are not available to the general public as investment vehicles.
Federal employees who were first employed before 1987 typically fall under the CSRS. CSRS employees have a defined benefit plan. They contribute 7 percent to 8 percent of income to their annuity, and the employing agency matches that contribution. Employees can also make voluntary contributions of up to 10 percent of base pay. The CSRS is a very secure system, with a predictable annuity stream.
Employees hired later than 1987 fall under the FERS system. The FERS retirement program includes a Basic Benefit Plan, Social Security and a Thrift Savings Program. The FERS is more transferable if an employees leaves federal service, but is not as secure and predictable as the CSRS plan.
If you are a prospective federal employee, the website of the U.S. Office of Personnel Management (OPM) provides information about the benefits of being a federal employee.