Retirement And The Immediate Annuity
Retirement And The Immediate Annuity
Several types of annuities abound on the market. The variety gives individuals more power, choice and flexibility. Two basic annuity-types are the fixed and variable annuity. Annuities can be further divided into immediate and deferred annuities. The immediate annuity is of particular interest, as it is generally tailored to the retirees market and is viewed as a serious option for those who have not planned properly for retirement. That it is the best option is not a given however. To be certain, it is important to examine some of the merits and immediate annuities, particularly single-premium immediate annuities.
Merits
The proceeds of an immediate annuity of the fixed variety may be tax-free (depending on local tax laws). The immediate annuity would begin and continue the payout phase tax-free. The proceeds from the fixed annuity would generally be higher than market rates for the lumpsum invested. I would add here that, with the immediate annuity I’m familiar with, this is only marginally so. The good news is that immediate annuities can provide a pension similar in amount to that of a deferred annuity with the same cash-value at maturity.
The pension from an immediate annuity usually is protected from creditors. This is also a benefit the deferred annuity provides throughout its accumulation and payout phase. That provision safeguards an individual’s income stream when they may no longer have or wish to exercise their earning power.
The immediate annuity provides an alternative for those who want a lifetime guaranteed income. For those who have not planned for retirement using annuities, the immediate annuity allows for the exchange of a lumpsum for a lifetime pension.
Do not get carried away with the merits. The immediate annuity could serve the interests of a certain segment of retirees. As with all packages, the immediate annuity has its demerits:
Loss of ownership of one’s retirement fund: When you exchange a lumpsum for a pension, you lose all claims on the actual fund you invest. In effect, you lose in order to gain. It would therefore not be wise to invest more than forty percent of your retirement fund in a fixed annuity.
The immediate annuity may not necessarily be the best option. In fact, a fixed deposit that guarantees one’s capital and the interest rates can prove much better. Even though interest-only payments are marginally lower than the guaranteed pension from an immediate annuity, the invested fund remains the investor’s asset with a fixed deposit.
While there seems to be more merits than demerits, the demerits have a heavier weighting. If one is comfortable with exchanging a lumpsum for a pension, has extra savings or needs to protect or guarantee income during retirement, the single- premium immediate annuity would be useful. Contrary to popular belief, the immediate annuity should not be used in the context of desperate retirement planning. It must be employed with due attention given to the role of an income stream and a healthy retirement fund during one’s retirement. Read about the merits and demerits of deferred annuities <a rel=”nofollow” target=”_new” href=”http://ezinearticles.com/?Annuities-and-Retirement—A-Critical-Perspective