An annuity is really just a cross between an investment and an insurance product. The idea is that you invest a sum of money in another organisation like a charity or insurance company. You won’t get your original investment back, but in return they guarantee to pay you a higher return than you might get from another type of investment (such as a bond) and what’s more, the payments will continue for as long as you live.
Variable and fixed rate annuities
There are variable annuities and fixed annuities. Variable annuities are usually linked to the stock market, so their rates can go down as well as up. Fixed annuities offer a more reliable rate of return. Some of the best types of annuities adjust for rises and falls in inflation too.
Deferred income annuities
A selected group of insurers offer deferred income annuity policies. After your personal finance has been invested, the insurance company holds it for a period of years before beginning to pay back out to you. Waiting for payments to begin to kick in has the advantage of building your investment over several decades in order to get back more cash in the end. However, the disadvantage is that the value of the money you originally paid in may fall with inflation or the stock market, plus will only eventually be paid at all if you are still alive!
Annuities and bonds
A bond is when an investor loans money for a set period of time at a certain rate of interest. Generally speaking, annuities provide a greater return than bonds the older you are. If you are in your late 60s or 70s, insurance companies gamble that you will not live too long and that they will save money even if they offer you a higher rate of interest when you buy an annuity. Even if you think long life is in your genes, it is worth remembering that you will never get your initial investment back from an annuity, so you might not make as much as with bonds after all.
Annuities and taxes
Taxes associated with annuity income can become complicated. Don’t just rely on money blogs when making decisions about annuities. Make sure you speak with a professional advisor.
What if I change my mind?
It is not unusual for annuities to charge a fee if you change your mind. Sometimes these can be very large. It is important to be clear about the contract you are signing in case you decide to opt out later.
Written by Wendy Davey
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