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Everything you need to know about annuity plans
There are many times of investment for securing your future. One of them is an annuity plan. Annuities are a sure way of having a fixed income for life. It is something you can rely on long after retirement. All you need is to get good rates for your investment to make the most out of them. Even though annuities can give you a reliable source of income, it is important to learn their downsides too.
Planning for your retirement is critical and that is why you should make the most of your earnings when working. The goal is to save and accumulate enough for your retirement. Investing in your savings will save you from financial distress and that is why things like annuities exist.
Investing in Annuities
Annuities are an investment option that gives you a guaranteed passive income for a given period. They are designed to protect investors against the risks of getting broke after depleting their resources. An insurance company bears this risk on behalf of the investor. Annuities can either be immediate or deferred:
1. Deferred Annuity. This type of annuity requires the investor to build a corpus first and then use it to purchase an annuity after retirement. The insurance company makes this possible through a pension plan.
Upon the end of the pension plan, the investor then uses the accumulated funds to acquire an annuity. You will be required to invest at the minimum, a third of the accumulated amount to buy an annuity after retiring.
2. Immediate Annuity. With an immediate annuity, an investor pays a lump sum instead of making premiums over a specified period. In this arrangement, the instrument makes regular guaranteed payouts to the investor. This option is usually bought by an individual that is eyeing retirement and is seeking to get a monthly income immediately.
Why Buy Annuities?
Many people buy annuities for different reasons. Here are important benefits that should make you consider buying them:
· For financial security reasons. With annuities, you are assured of receiving monthly payments for the rest of your life. The insurance company will take the risk on your behalf to determine how to give you the money throughout your life. You can choose how often you want to receive the money. It could be in form of fixed payouts in regular intervals either per month, per year, quarterly or twice every year.
· Protection against reinvestment risk. Making the right investment choice is always a challenge for many people. This is especially in the amount of interest that can be recouped from a specific investment.
Instead of gambling between options that could be too risky to the point of losing your hard-earned money, annuities will give you a somewhat easy way through. You will get the same payout interest rate for life.
· You can invest as much as you want with annuities. It all depends on the amount of money you want to receive in each payout.
Pitfalls with Annuities
Annuities can be a great solution when going for retirement. However, it is important to know what they entail as you plan for your retirement. With annuities:
· You have no access to capital. If you want to access capital from a financial institution, annuities may not be the best bet. In some other forms of investment, the capital comes back to you but this is not the case with annuities.
· The rate of return is low. Annual returns on annuities are lower than other investment products despite giving you income security. This is not the option to go for if you want better ROI.
· Inflation is not factored in. Annuities don’t fight inflation. You will not be shielded against a rise in prices.
· You cannot do a premature withdrawal. That means you cannot access your principle once you commit to an annuity plan.
· You will only get simple interest and not compounded interest limiting the much you can earn!
The decision about Annuity Plans!
Annuities are good for people that don’t need to make a lump sum expenditure in the future. You cannot access capital in an annuity plan hence not a good idea to buy them especially if you will need to access a large sum of money in the future.
This article does not necessarily reflect the opinions of the editors or the management of EconoTimes