Long considered a CD alternative, fixed annuities are very popular today. Because they pay higher interest rates than CDs and defer taxes, many people with fixed incomes find a fixed annuity a better option than tying up money in CDs or storing it in a money market account…
As with a CD, you can pay lump sums into a pension. You must keep the money in retirement for a period of several years, usually between 2 and 5 years. The longer you leave the money in, the higher your interest rate will be. Depending on the annuity purchased, an annual amount can be withdrawn without penalty. This amount is usually around 10%.
Is an annuity right for me?
In the past, pensions were only seen as an investment for people approaching retirement. But today, an annuity can be a smart investment for people of all ages. Remember that an annuity can be invested in a variety of different investment vehicles, ranging from modest to rapid capital growth alternatives. The following are good uses for an annuity:
o You need a higher yielding alternative to certificates of deposit (CDs) and money market funds
o You want your long-term savings to grow faster without ongoing taxation.
o You need to save more for retirement, but you’ve “maxed out” your IRA and 401(k) or 403(b).
o You must roll over (reinvest) existing tax-deferred savings such as pension plans.
o You must secure a lifetime income.
o You must secure an income for the rest of your life and that of your spouse.
For buyers of a special type of annuity called a fixed index annuity, you want to protect your “principal” with a guaranteed return while investing in the stock markets.
Tax benefits aside, there are important reasons to invest in a fixed annuity, especially when you consider the limitations of other forms of investment.
Fixed annuities can provide:
o Guaranteed income. A fixed annuity can provide you with a guaranteed income for life, no matter how long you live. No other investment vehicle can offer this guarantee.
o Unlimited contributions. Unlike other tax-deferred investments like IRAs, you can contribute an unlimited amount of money to a fixed annuity throughout the year, either in regular installments or as a lump sum. Individual airlines may place a cap on the total amount you can put into a fixed annuity without approval.
o bonus rates. Some insurers give investors a premium at the end of the first year of your fixed annuity — extra interest that further increases your investment. The bonus increases the capital of the fixed annuity on which future interest is calculated in subsequent years, significantly increasing the ultimate value of an annuity fund.
o No risk of loss (“fixed” annuities). Unlike other forms of stock or fund investment, a fixed annuity is invested in mutual funds or is tied to stock market performance. It may contain minimum guarantees to limit investment risk.
o Fee-free annual withdrawals. Most fixed annuities have a provision that allows you to withdraw a certain amount per year free of charge.
o Rollover without penalty. Payments from company pension schemes or profit sharing can be reinvested without incurring ongoing taxes or penalties.
o No estate on death as long as you specify beneficiaries. This means it’s easier and cheaper for your family to maintain the value of the fixed annuity.
o No entry fees (“no load”) or annual fees. Fixed annuities tend to be no-fee and no-fee investments, meaning you have more in your pocket. Compared to other invested investments where some of the money is used to pay an initial or annual fee.
o Income from shelter investments. Retirees can use a fixed annuity to protect investment returns that would otherwise result in a tax on Social Security benefits.