If you are looking for investment options and have been talking to financial advisers, you might have come across annuity investments. These may be one of the most popular products being endorsed by most financial advisors to their prospective clients and unless you are familiar with how these investments work, it will be hard
Often offered to individuals who would like to have a steady income upon retirement, annuities can be considered as an income or investment. Oftentimes, it is offered by an insurance company and an investor will have to pay a fixed-rate during the period of annuity and this will depend on the schedule of payment he or she prefers. However, a question often raised about this topic is this, “Are annuity investments good or bad for retirement?. To have a clearer picture, here are some of the benefits and setbacks pointed out by advocates for and critics of investing in annuities.
List of Pros of Annuity Investments
1. Future Financial Independence
Supporters of annuity investments say that it is wise to invest in these products especially for individuals who are just starting to build their careers and are still young. Since they still have a long way to go until retirement and have all the chances to grow in their chosen careers, investing in annuities will build their finances while they also earn from another income. By the time the annuity period matures, they will have money on their hands and a source of income after so many years. Moreover, the investor has options on how they will get the money, from monthly to lump sum. This flexibility will make room for more opportunities and better planning on what to do with the money earned.
2. Better Than Banks
Advocates for investing in annuities claim that the investor gets a higher interest rate from these insurance products as opposed to the low interest rates given banking institutions. Your financial adviser will tell you that annuities give payouts that are guaranteed to be higher and even highest. These income payments will be given for a lifetime depending on the actuarial life expectancy at the time the investor receives payments. This is also why younger investors are encouraged to join this investment bandwagon.
3. Tax Reference
By investing in annuity, say deferred annuity, which is the type which lets you earn income after a period of time, usually after retirement, it allows the investor to put off paying taxes. Moreover, the lifetime payment to the investor is computed by adding the principal to the interest which makes the value higher when factored.
4. Numerous Options
Supporters of annuities say that potential investors have different types of annuities to choose from depending on lifestyle and preference. For those who want to earn right after investing. This is suited for employees who are nearing retirement. Conversely, for people with extra money to spare and cash they do not intend to spend for a period of years, a fixed annuity is the preferable choice. This is because they cannot withdraw their investments before the term ends. By having options, the investor will be able to get the rewards of investing money in the annuity type suited for him or her financially.
5. Benefits Other Than Periodic Payouts
Apart from deferred taxes on variable annuities and receiving periodic payouts from the insurance company depending on the period the contract holder chooses, he or she can also assign beneficiaries who will receive the insurance money in the event that the contract holder passes away.
List of Cons of Annuity Investments
1. Negative Tax Implications
Critics of annuity investments say that although these give investor tax deductions on deferred annuities, they will also pay a price. Even if gains will be taxed on regular rates, variable annuities with equity that is exposed, taxes on capital gains can be doubled. Additionally, if the investor has a deferred annuity and decides to withdraw the investment within the first period, the amount to be withdrawn would be interest money which is 100% taxable.
2. Lack of Liquidity
People who are not into annuity investments say that money will be locked or tied down for a period of time. If the investor suddenly realizes he or she needs to withdraw the money, there are costs that come with it. Also variable annuities can have strict regulations. This includes reaching a certain age before being able to withdraw gains without being taxed. Also, there will be reduction in the payout and there will also be surrender charges to compensate for the commissions given to agents.
3. Little Protection
Criticisms about annuity investments include the protection or the lack of it for investors with variable annuities. Apart from the lock out period which keeps the money of investors from being withdrawn without charges or penalties, the payout for variable annuities depend on the condition of the market. Also, insurance companies usually invest the money of investors themselves. That is, if these investments fail, it can be possible that investors cannot get their money back.
4. Cost of Living Concerns
Some experts say that although annuities can be rewarding, these investments are also risky especially when it comes to inflation. Fixed annuities, for example, pay investor fixed amounts. So, even after so many years, the amount received by investors will not increase nor decrease. And with the cost of living becoming higher, the payout might not be sufficient during inflation.
5. Costly Annual Fees
Another disadvantage of investing in variable annuity is the high cost of the annual fee paid by the investor, not to discard the thought of having to pay for insurance annually that can be at 1.25%, insurance rider fees and investment management fees. These are on top of the commissions agent gets from the insurance company which the latter will be getting from investors, one way or the other.
Annuity investments can work for or against an investor and just like any investment, annuities have rewards and risks. Experts suggest that annuities should just be part of a person’s financial portfolio and should be complemented with other types of savings.
Crystal Lombardo is a contributing editor for Vision Launch. Crystal is a seasoned writer and researcher with over 10 years of experience. She has been an editor of three popular blogs that each have had over 500,000 monthly readers.