Fixed income investing grabs a lot of headlines these days as it appears to be a straightforward, systematic and lucrative investment opportunity, but only until the veiled facts are released. So here’s a detailed guide for those who want to know what the downsides of investing in a fixed indexed annuity are before taking the words of their investment advisers and vendors and preparing to put their money in a pitfalls invest cons. Often, at the time of signing the final application for an investment with a fixed indexed annuity, investors do not pay attention to the column with the terms and conditions and enter their unique signatures, thereby concluding the contract. However, there are some negatives that are intentionally or unintentionally kept secret throughout the process. Let’s take a look at the main ones.
Unfolding the untold story of limited returns
A fixed indexed annuity locks up your principal for a long period of time, say 15 to 20 years. In addition, the returns achieved are capped by the insurance companies; Prevent you from having full access to your own money. Certainly, the investment plan was designed to generate returns, as is the case with indexed markets, but some limitations have been imposed that limit investors’ gains. In addition, a fixed indexed annuity is designed with an emphasis on fund management, regardless of how far capital growth is neglected.
Don’t ignore tax issues
Income from a fixed indexed annuity is subject to income tax, unlike other indexed instruments which enjoy the benefit of paying a much lower capital gains tax. Not only does this confirm a higher tax rate; it also obliges the applicant’s nominee/survivor to pay part of the proceeds from this scheme as income tax. However, this instrument enjoys a deferred tax treatment; nevertheless, in terms of tax policy, it is far from being an ideal pension instrument. Procedural Fees Can Dilute Your Returns Procedural fee, operational costs and fund manager fees add up to 1-3%, depending on internal and some external factors. This further reduces the return for the investor and most of the time the return performs worse than indices.
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Ouch! Does that withdrawal fee hurt?
With a fixed index annuity, the investor has to pay a prepayment penalty of 5-10% for the amount exceeding the specified threshold or the maximum annual no-penalty amount. Once you know your withdrawal limit and how to stay within the brackets, things run smoothly, but when the annual withdrawal amount exceeds the limit, things could turn upside down. You may not be looking for a fixed indexed annuity, but chances are it has been sold to you! If that’s the case, someone who understands your current and future financial needs and is good at planning a scheme for you and your heirs can likely act as a shoehorn in this situation and guide you to shape your retirement and get at least something beneficial from it.