Income Annuities

Income annuities are, at heart, very similar to pension annuities in practically every way. The real difference between the two is that pension annuities are annuities that are purchased with a lump sum from your pension plan while income annuities may be purchased in one of several ways. Some income annuities allow the investor to purchase the account over the course of several years by making monthly premium payments rather than investing the entire principal amount up front.

Either way one looks at it, the goal of income annuities and pension annuities are the same: provide a guaranteed, reliable source of income for the retirement years. There are a couple of different approaches to income annuities, depending on how close a person is to retirement and how much they are able to invest at any one time.

Immediate Income Annuities

Immediate income annuities are those that are purchased that offer monthly payments right away. Generally speaking, these types of annuities will require the entire principal amount to be paid at the time of their purchase. For that reason, pension annuities are the most commonly seen immediate income annuity investment.

Most immediate annuities are designed to give higher monthly payments than their deferred counterparts. The reason for this is that rather than receiving only interest payments as is what occurs with the deferred option, the investor receives a portion of the original premium in addition to the earned interest every month. When the funds are depleted and the contract expires, however, there is no allowance for payments to continue. One must purchase a new annuity to continue the income.

Deferred Income Annuities

Deferred income annuities are those that are purchased either in one large lump sum or over the course of several years, whose payments do not begin until a predetermined future date. This is an ideal option for the person who will be entering retirement in the next ten years or so. The lump sum investment option allows the investor to accumulate interest tax deferred until the time payments are set to begin. The monthly payment option allows those who do not have much to invest at one time an avenue by which to prepare for their future and still earn a small amount of interest, also tax deferred.

Deferred income annuities also have the flexibility to cash in the value should an immediate need arise for the funds. Immediate annuities generally allow no such option as the purchase is non-refundable. This means that investors have more authority in what happens with their retirement fund and when with the deferred option. However, the immediate option may be the only option available to some who have been previously unable to arrange for a source of retirement income and are in need of the support now.

Each of these two types of income annuities have their own advantages and disadvantages. A financial counselor or advisor may be able to help those who are having trouble deciding which type is best for their retirement.