Financial jargon can be seriously confusing for everyone, retired or not. It’s not uncommon that UK citizens miss out on incredible financial opportunities, purely because they don’t understand the potential of the market.
That’s where we come into play. Our goal at SovereignBoss is to make it easy for you to understand all the terminology that’ll aid you in making smart financial choices.
The word “annuity” has a few different meanings, so we’ll help you discover:
- What’s can mean.
- The types of annuities available in the UK.
- The pros and cons of annuities.
We’ve researched the top information on the subject and we’re here to share. Now, let’s look at everything you need to know about annuities.
What Are Annuities?
It’s never too late to think about your future. If you’re currently planning for your retirement, an annuity is a great option to consider. In a nutshell, an annuity is designed to convert your savings into an annual pension.
Why’s this great?
You’re guaranteed an income for the rest of your life.
Technically, an annuity is a series of payments made at regular intervals over a fixed period of time. You’ll then receive your income or capital accumulation,1 during a contractually defined or agreed upon period of time.
Annuities are often associated with retirement2 planning because they offer guaranteed lifetime income and lump-sum payouts!
Types of Annuities
The best way to make an informed decision about your retirement investment is by understanding the different types of annuities. A few common categories, include:
Timing of Payments
Annuity-immediate payments are due at the end of a payment period, so interest accumulates between the time the annuity is issued and the first payment. Payments of an annuity-due are made at the start of payment periods, resulting in an immediate payment to the issuer.
Contingency of Payments
Certain or guaranteed annuities work by you making payments over a predetermined duration. Contingent annuities are only repaid under certain circumstances.
A common example is a life annuity, which is paid over the annuitant’s remaining lifetime. Certain and life annuities are guaranteed to pay for a certain number of years before becoming dependent on the annuitant’s survival.
Variability of Payments
Fixed-payment annuities work with a predetermined return on the initial investment if the service is supplied by an insurance company.
They enable direct investing into a variety of funds designed specifically for variable annuities. In most cases, the insurance company promises a certain death benefit3 or lifetime withdrawal benefit.
Payments are linked to an index in an annuity. The minimum payment is usually 0%, and the maximum payment is fixed. The performance of an index decides whether the consumer receives the minimum, maximum, or something in between.
Deferral of Payments
A deferred annuity is one that pays out after a set length of time, usually after retirement.
On the other hand, an immediate annuity works when you pay a lump sum, in return for a regular and guaranteed income.
Pros of Annuities
There are fantastic benefits of annuities. Here they are:
- Guaranteed income for the rest of your life.
- It’s not subject to stock market fluctuations.
- It’s an income to rise with inflation.
- Because of your poor health, you’ll be able to earn more income.
Cons of Annuities
Like with all financial products, annuities do come with their pitfalls. Therefore, you must seriously consider your options and get in touch with a financial adviser before making any final decisions.
These downfalls include:
- You won’t benefit if your life expectancy is quite low as they are generally long-term plans.
- You might be hesitant to take a chance with the annuity rate as it can be unpredictable.
- You want to keep your money invested through alternative means.
- You may change your mind.
Annuities generally have a favourable tax status, which may alter how appealing they are relative to other investments, due to cross-subsidy and the guarantees an annuity can provide against running out of income and being dependent on state welfare in an old life.
In some countries, immediate annuities are a required component of some pension saving systems where the government offers tax breaks if money is put into a fund that can only or mostly be withdrawn as an annuity.
The Netherlands has such programs, as did the United Kingdom until 2006. In the Netherlands, tax deductions have only been allowed since 2003, and only if the old age income will be less than 70% of current income without additional savings.
The French government is now honouring an unusual debt contract: a 1738 annuity with a current yield of €1.20 per year.
Annuities are long-term investments that provide guaranteed income for life. They can be structured in many ways to suit your needs including fixed annuity, variable annuity, and equity-indexed annuity.
An important factor when deciding which type of annuity is best for you is the amount of risk you’re willing to take on with your investment.
If you prefer a low-risk option, then a fixed or variable annuity may be right for you; if not, an equity-indexed might make more sense. Talk to a financial adviser to help you walk through all these options. We hope you can enjoy a peaceful retirement!