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Which Annuity Plan Is Right for You?

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You might hear the word annuity and think about retirement but annuities can be paid out for lottery wins or casino winnings as well. Most internet users checking for annuities will be interested in them as a financial product that pays out during their golden years. A life annuity is an insurance product that pays out a set amount at regular intervals while the purchaser is alive. It's sold as an insurance policy but it acts like a pension because you're guaranteed a regular payment. As you'd expect from any insurance product, there are lots of different variants including direct benefit pension plans.

Direct Benefit Pension Plans

This annuity is typically provided by employers but it's also the type of pension paid out by the US government as social security. The payment is normally determined by the worker's years of service, their age and the amount they earn rather than the return on their investments made with their pension funds. This type of pension is not that common anymore but governmental and public bodies still offer it to their employees. The most common formula used to work out the payment takes the employee's final salary and pays a percentage of it every year until death.

Individual Annuity

You might want to use annuity payments to supplement a different type of pension. If so, you'll need an individual annuity. These are insurance products that have a complex set of options that mean the average Joe can't work them out for themselves. You can use annuity calculators to help you figure out which option is best for you but you'll need to take advice to determine if a variable annuity, an index annuity or a fixed annuity is the one to go for.

Fixed Annuity

There are lots of advantages to taking out a fixed annuity. You get guaranteed interest earnings and protection from market volatility. Your money is accessible and you can expect tax-deferred growth with this low-risk investment. But there are downsides too. The fixed nature of this product means that over many years your investment may grow slower than inflation meaning that you won't have the spending power you're expecting. The other issue with this type of pension is that any money taken out before the age of you're 59 ½ is subject to a ten percent federal tax penalty.

Variable Annuity

This type of annuity gives you a little control over your retirement fund because you choose which investments to put your money into. You get an income based on the performance of the investments so you're not guaranteed a fixed amount which can be a good thing if your investments are doing well. The advantage is that your investment won't struggle to keep up with inflation but the major disadvantage here is that you're risking your money by investing it in stock that can go down in value.

Index Annuity

This annuity ties your returns to an index like the S&P 500 so you're protected from investment loses but you get stock market-linked growth. You're guaranteed a minimum fixed return on your investment thanks to a minimum interest rate. You get a lifetime income, but in a low-interest environment, the return on your investment can be as low as one to three percent. Savings held in a high-interest savings account could do better than that and the only risk to them would be if the financial institute you save with goes bust.

Are Annuities Good or Bad?

With life expectancy getting longer and longer, annuities make more sense than ever because they pay out over your lifetime, however there are downsides that make this type of investment less attractive as we've shown, and there are lots of other places you can leave your money to grow like long-term savings accounts or through property acquisitions. You could play the stock market yourself and bank those earnings in a high-interest account that you don't dip into until retirement or you could make money through something like peer-to-peer lending which involves a small risk for a good reward.