Sep 6 2012
Of late, annuity plans have become quite popular in comparison to other retirement products, particularly among those people who are not ready to sacrifice a part of their retirement savings. However, there are some downsides to it as well. My pension expert is dedicated to make you familiar with the whole concept.
1) Pros of annuity plans
The pros or benefits of annuity plans are listed below:
Lifetime income – An annuity plan assures lifetime income for you as long as you stay alive. The older you get, the bigger the monthly payments you receive will be.
Safeguard against rise in inflation – Annuity plans can be tailored so that it does not get affected by any rise in inflation. This is a very significant benefit offered by annuity plans since inflation can have a damaging impact on your income. Similarly, you would not be exposed to market losses either.
Safeguard of Principal Amount – In case of equity-indexed and fixed annuities, the value of the plan can be assured at or over the sum which you invested. This helps you make sure that you or your inheritors will get the same amount of money which you have invested in the plan as a minimum. You might also qualify for a premium if you live more than the life expectancy.
Tax effectiveness – Annuity plans are tax-exempt plans which are particularly beneficial for retirees who have a limited amount of income. You will also have the option of incorporating other eligible investments into an annuity plan (if permitted) and there are no tax fines imposed for this option, you simply have to pay tax on the earnings generated by the annuity.
Safety of investment – Annuities are good investments for those who don’t want to assume risk in life. Fixed annuity plans will also guarantee a predetermined annuity rates for a specific tenure which will not change and bear no risk of decreasing.
No contribution restrictions – There is no limitation as to how much you can contribute to your annuity plan, so you can save towards your retirement flexibly, thus increasing the lifetime income that your accrue.
2) Cons of annuity plans
Given below are the downsides or negative aspects of annuity plans:
All annuity plans don’t offer similar benefits – The majority of public contends that fixed annuity plans are the perfect solutions for their retirement income and while other variable annuity plans are less fit for purpose; and sometimes this latter option may end up being more costly. Therefore, it is crucial to carefully read and comprehend the terms and conditions of your annuity plan, before settling for either option.
Smaller yields on your investment – When you compare the returns or income offered by fixed annuities and equity-indexed annuities with the returns provided by equities, stocks, and other investments, you may find that the returns are less favourable. However, if you take into account the safety factors that it provides; fixed annuities or equity-indexed annuities are safer investment tools when compared to stocks options.
Lack of flexibility
Annuities are considerably less flexible than other categories of investment. As soon as you enter into an annuity agreement, the amount invested gets fix to that particular annuity plan for the rest of your life. As a result, you lose access to the amount, so it is important to consult an expert before you make any final decisions.
Various expenses – An annuity plan is associated with various expenses such as administrative costs, annual fees, and mortality charges. All these expenses may counterbalance to the cost-effectiveness of an annuity plan.
Tax penalties for premature withdrawal – You will be subjected to pay tax penalties in case you withdraw the amount before maturity and the taxes will be imposed at the ordinary tax rate and not at the capital gains tax rate.
So, you have the pros and cons of annuities in front of you. Look at these and make a learned decision how to go about annuities if you really want to secure your post retirement life.