Should You Buy an Annuity?
Annuities are financial products that can be bought from companies selling life insurances and managing super funds. Funds invested in annuities are used by these institutions in diversified investments to further grow the capital. After some time, when the annuitization period is reached, investors are paid back for their investment.
Annuities work similar to a pension since it provides you a surefire income source. However, annuities are more flexible in some ways than Age Pension plans. One of them is that you can predetermine how much you’ll receive as annuity, depending on your agreement with the insurance company. The amount can be based on a fixed rate or made adaptive with the market’s inflation rate. You can also choose to receive the income in a lump sum or in tranches for the rest of your life or for a set number of years. Annuity payments can be scheduled to be done monthly, quarterly, every 6 months, or annually.
Types of Annuities
Financial institutions often sell different types of annuities to provide better investment options to their clients.
Fixed term annuities
This is the most common choice among investors because it provides straightforward terms and conditions. Fixed term annuities give you a steady source of income for a fixed period which can be as short as 1 year to a maximum of 50 years. Regular payments are made during the chosen period.
Lifetime annuities guarantee you a regular income source as long as you live. If you’re worrying about outlasting your savings for retirement, this type of annuity will give you a better peace of mind.
Are Annuities For You?
Before choosing to purchase one in preparation for your retirement, it’s best to know the pros and cons of this investment option. The following information will help you decide whether an annuity is suited to your investment mindset or not.
- You get a guaranteed income regardless of the market’s performance
- When you reach 60 years old, you’ll enjoy tax-free annuities purchased using super funds
- You can enjoy a 15% tax offset on your annuities when you reach the age of 55 to 59 years old
- Investment earnings aren’t taxed
- You can set how much annuity to receive and when to have it
- You can’t withdraw your money as a lump sum before annuitization; not without great drawbacks
- There’s no option to choose how your money is invested by your fund manager, unlike in super funds
- You’ll have a harder time transferring your funds to another investment vehicle
- Usually, annuities pay less as time goes by when it’s computed against inflation rates
- Lower interest rates compared to investments anchored to the market
In case you die while in the middle of receiving your annuity, your chosen beneficiary will receive it instead, that is if you nominated one. Usually, people nominate their spouses or dependents as their ‘reversionary beneficiary’. However, the beneficiaries will receive a reduced amount, let’s say for example 75% of what you used to receive when you were alive.
There’s also another option you can choose if you want to provide more security to your beneficiaries. Choosing the ‘guaranteed period’ option will let your beneficiaries receive the annuity as a lump sum or in tranches as a regular income stream, both in full amount without any deductions. This agreement is triggered in case you die within the set guarantee period.
Annuities are best for conservative investors who want to get a guaranteed income when they retire. If you don’t mind earning lower interest rates and prioritize receiving a stable income over larger capital gains, then an annuity is the investment vehicle suited to your appetite. Otherwise, it’s best to look at other financial products that can maximize your gains while you’re still earning a regular paycheck.