Annuities Explained

Annuities, in the broad sense of the word, are designed to provide the investor with a steady source of income upon retirement. There are several different types of annuity options, available, however, and each comes with its own set of advantages and disadvantages. In order to have annuities explained, it is first important to understand what the options are.

Types of Annuities

• Fixed rate annuities: the lowest risk of all annuities, available in both immediate payment and deferred payment options.
• Enhanced annuities: Also available in immediate and deferred payment options. This type of annuity generally yields higher monthly payments owing to the shorter life expectancy of an individual due to medical ailments.
• Fixed indexed annuities: These types of annuities offer the greater earning potential similar to a variable annuity, but with the principal protection of a fixed annuity.
• Variable annuities: Offer the greatest potential for growth, but also the highest risk for loss. Typically only available in deferred payment options.

Lump Sum versus Payment Annuities

Lump sum annuities are those that are purchased with one large investment. A typical example of this is the pension annuity, where an individual cashes out their pension fund and invests it into their retirement annuity. Payment annuities, on the other hand, allow the investor to make regular contributions toward their principal goal in much the same way one would make payments on a loan. Interest is earned on the balance in the account, but takes longer to accumulate since there is less principal in the account initially. Earnings will increase exponentially over time, however, as the principal increases and interest is compounded.

Taxes and Annuities

All annuities are tax deferred investments. This means that as long as the money is simply accumulating interest, no taxes are due on the earnings. This is in contrast to other types of retirement accounts that require and individual to pay taxes on capital gains. However, when the annuity switches from earning to the payout phase, all payments are considered to be income and are taxable at the current income tax rate for the individual’s tax bracket.

Additionally, there is a 10 percent tax penalty for any withdrawal on an annuity before the individual reaches the age of 59 ½. For that reason, it is usually best to invest in annuities that will not enter the payout phase prior to the individual reaching the minimum age for penalty free withdrawals.

Those who wish to have annuities explained in greater detail should enlist in the aid of a qualified financial advisor. Because every annuity is different on a case by case basis, it would be impossible to lay out a singular guide for every situation. It may be that annuities are the best option for one person and the worst for another, depending on all manner of influences. Therefore, it is wise for any individual considering making this type of investment to thoroughly research all of the options available for retirement accounts before making a final decision.

Also, be sure to read our page entitled Annuities for Dummies as well. This will give you further information that will help you to provide yourself with a sound retirement plan. Questions or comments? Feel free to send them to us by using the comment section. Here at lump sum annuity, we desire to provide you with the best information available on the web. Your investment success is our success!