Annuity Investments Pros and Cons List

A lot of people fear retirement because of a lack of financial security. However, you can have security if you save up for your pension, ensuring that you will have enough money to pay for all your wants and needs for the rest of your life. One of the most viable options is annuity investment.

Annuity is an investment product created by an insurer. It provides you income that will last for the rest of your life by swapping your pension savings. The amount that you will get is based on the rate of the annuity providers. This used to be the only option for people with defined contribution pension. Although the pension reforms of April this year offered people more options, annuity may still be the best choice for a lot of retirees. Take a look at the pros and cons of annuity investments to know whether this is right for you or not.

List of Pros of Annuity Investments

1. They guarantee the highest payout.
It is important to note that annuities offer lifetime income payments that are based on your actual life expectancy, starting at the time when you first received payments. But annuity investments always ensure a higher payout than drawdown.

2. They do not require annual fees.
Single premium immediate annuities and deferred immediate annuities have no annual fees. They are also considered the most efficient way to use this type of investment to obtain lifetime income.

3. They are not taxable, at times.
A portion of your income may not be taxable if you annuitize an asset outside of IRA. This is because the real dollar amount would be higher when included in the calculation of your lifetime income.

4. They have principal protection.
Opting for fixed annuity means making your money completely safe. Although you might experience lower-than-expected return as a worst-case scenario, you can take comfort in knowing that you will never have a loss in your principal. Even when your annuity provider goes out of business, your money will still have protection. Each state has a guarantee association that ensures policyholders that their savings are secured.

List of Cons of Annuity Investments

1. They have a high risk of losing liquidity.
Upon purchasing annuity, your money will be locked in for a certain period. In other words, you give access to your money in exchange for a lifetime of cashflow. If you decide to withdraw the money, you could be made to pay a surrender charge, which could be eight percent or more of your account value after a year. Although the said charge generally decreases annually until it becomes zero, some products may allow for a certain amount of withdrawals with no penalty.

2. They may have early withdrawal penalties.
Annuities are generally designed for when people retire. So, if you withdraw gains from your account before you reach 59 ½, you could be charged by the IRS a 10 percent penalty. Aside from that, you’ll also need to pay ordinary income tax on your monthly income. But, you won’t be taxed if you make withdrawals on your principal since they are paid on an after-tax basis.

3. They have no growth feature.
Fixed annuities would obviously offer little to no potential of growth as compared to other investment options, such as stocks and mutual funds. But if you want growth while your principal is kept secured, you can opt for a fixed indexed annuity, which ensures incomed based on an index’s performance, which is used as a benchmark.

Before signing anything, it is important to do your homework first. Keep in mind that the purpose of annuity investments is to transfer the risk of losing your income when you retire to an insurance company. This is why it’s best to weight out all the pros and cons to ensure it is the best option for you.