LIFE LETTER MATURE
Pros and cons of annuities
With the turbulent times we have been experiencing in the markets, more people are considering annuities to ensure a certain income in their retirement years. It might not suit everybody to put their funds into annuities, and there is always the question of what percentage do you want to invest in them, and how much will you leave in the markets? There is no clear-cut answer, and you’ll need to weigh your personal circumstances to see how annuities can fit into your retirement plans.
One reason that you will find different reactions to the idea of an annuity is they come in several “shapes and sizes”, and offer different guarantees. You will probably need expert assistance in figuring out what works best for you. There are two main types of annuity: an immediate annuity and a deferred annuity, and you would buy them for different reasons.
An immediate annuity, which you can buy for a lump sum, will give you guaranteed regular payments for as long as you live. It’s just like a pension, and the insurance company takes the risk that you will live for a long time. You can also get guarantees that you or your heirs will get back the amount you invested in the annuity.
The deferred annuity is more like a tax efficient savings plan, where you make regular payments. There are varieties that come with insurance to protect these savings from losses, and pay out benefits on death. The savings can be invested in fixed returns or mutual funds. You don’t have to pay anyspacer taxes until you withdraw funds from the plan, although the withdrawals are taxed as income, which is a higher rate than capital gains.
You can also break annuities down into fixed and variable types. With the fixed type, the insurance company takes all the risk. With the variable annuity, the value can vary with the underlying portfolio, subject to some guarantees as mentioned above. Mary has a fixed annuity which runs for 10 years, and the best part is that there is little or no risk and her investment is growing. At the end, she can “annuitize” the fund and receive regular payments for life.
There are also downsides to annuities. For one, if you want to withdraw your money before the due date, there may be hefty penalties. The fees are also high, higher than a typical mutual fund. In fact, for variable annuities, where you don’t have the same guarantees, some advisors say that you are better off to make normal investments through a retirement plan, and purchase life insurance to cover the death benefit.
Income Planning – because it’s the right thing to do.
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