Should you invest in annuities?

An annuity is a contract between you and an insurance company under which you make a series of payments. In return the insurer agrees to make periodic payments starting at a pre-determined date. Annuities have several benefits including tax deferral, yield, liquidity and estate planning and are thus one of the safest investments bets around. You can invest any amount you like with no limits or penalties.

In an annuity, the principal return is tax deferred and you pay taxes only upon withdrawal of funds. When you are ready to withdraw funds from your annuity, you can select your payout options – fixed or variable, for a specific amount of time. Once this payout income begins, you will pay taxes only as the funds are paid to you. It is more likely that you will be retired at the time you start to receive the annuity payments which is beneficial as your taxes tend to be lower after retirement. The yield is higher than other forms of investments including CDs as there are more funds in your account to earn interest. Many penalty free annuities provide easy accessibility to your money thus giving you the added advantage of liquidity. Moreover, annuities are not subject to probate and can be transferred easily to your loved ones upon your death allowing for prudent estate planning strategy. An annuity can produce a lifetime income. You can withdraw up to 25% of profit on an annuity if diagnosed with a serious illness. Certain annuities even offer bonus to investors.

The accumulated annuity growth can be attained in two ways – fixed rate of return and a variable rate with a growth potential of investing in the stock and bond market. If you need a guaranteed rate of return, then go with a fixed annuity. A variable annuity rate will vary, and may yield a higher return for your investment, but it also offers higher risks.

There are some fees associated with the purchase of an annuity which vary depending on the type of annuity you purchase. These charges include administration, contract, mortality, expense risk and withdrawal fees. Check with your annuity financial planner to find out the fees you may incur.

Different types of annuities

• Fixed annuities - Fixed annuities offer guaranteed rates of return and safety of principal. The amount of the monthly payout in a fixed annuity is also fixed and doesn't change. This can give you a hedge against market volatility. The downside is that, over time, inflation may eat into the buying power of this fixed amount.
• Deferred Annuities – This is a long-term personal retirement account developed especially to help you grow your assets and provide you a steady income once you are retired. All your earnings are tax deferred which means you do not pay any taxes on your earnings until you are ready to withdraw the funds which are done at retirement. Deferred annuities contracts are also a more preferred option than investing in the stock market given the erratic behaviour and volatility of the stock market. No matter how much the stock market fluctuates, you are guaranteed steady payouts from your annuity.
• Equity Indexed Annuities – This type of annuity is linked to the stock market, yet it provides security and flexibility that is typical of the annuity, earns you money when the market is up and safeguards your money through a guaranteed rate of interest even when the market falls. You are thus guaranteed a minimum market return with a cap on the maximum return. You may see less growth but your potential for loss is also minimized.
• Variable Annuities - Variable annuities are a tax-deferred investment. They come with a minimal insurance contract so they can qualify for a tax-deferred status. The insurance is only a thin shield to secure the favourable tax treatment and only covers your contributions and not any of your investment gain. This is best for those you are retired and are likely to outlive their capital.

The primary form of payment in a defined benefit or pension plan is a monthly annuity. An income annuity is a simple way to turn a portion of your savings into monthly retirement paychecks. It’s the only product that guarantees income for the rest of your life. Such an arrangement can provide a solid foundation for your retirement planning. Thus, annuities provide a fixed monthly income and if this is in line with your investment goal then annuities are right for you.