Important Things To Consider When Going For A Retirement Or Pension Annuity
There are many things that you must consider before purchasing a retirement annuity. Some of them are:
Accumulation period is important
If you're going for a deferred annuity wherein you contribute in parts, then accumulation time is very critical. If you take an annuity very late then your compound principal will not be able to offset the trade-off you make while owning the annuity. Generally 15 years plus to your retirement time is the best time to go for a retirement annuity. For anything less it's better for you to take an immediate annuity later with your pension's lump sum and meanwhile invest in other instruments which can earn you a decent interest. This way you will also be able to get tax exempted returns.
Make sure of your liquidity
Annuities are a long term investment instruments. They lock your funds for long durations of time by imposing hefty surrender penalties. So make sure that you're not going to need the amount you're planning to fund your annuity with. It's good to bear in mind inflation and accordingly divide your income to fund your annuity. Some annuities offer the option of withdrawing a small fixed portion for a small amount of penalty however they also cut back on your payouts later on thus offsetting the purpose of planning for your retirement.
Know your payouts ahead
Always have a clear idea of the amount of payout your annuity is going to offer you. Some work with fluctuating payouts while others give fixed payouts. Insurer's past records and credibility also go a long way in ensuring steady payouts. Most deferred annuities guarantee a minimum rate of interest for worst case scenarios.
Read the fine print
That's a rule you should never fail to follow with financial instruments. Certain annuities have clauses favouring the provider over you. Especially, with regards to missed premiums in a deferred annuity. They may even use your compounded principal to pay for an unpaid premium or worst convert your deferred annuity to a reduced amount immediate annuity. So make sure you are aware of all such clauses before you commit to an annuity.
Tax benefits
Tax exemption is a major benefit of annuities if done properly. For registered annuities, the payout after maturity is not tax exempted. So, if your payout after maturity increases your taxable income during your retirement by a significant amount then going for an unregistered annuity would be more prudent. Alternatively, you may also go in for an immediate annuity at a later stage using an accumulated lump sum in which the payouts are tax exempt.
Accumulation period is important
If you're going for a deferred annuity wherein you contribute in parts, then accumulation time is very critical. If you take an annuity very late then your compound principal will not be able to offset the trade-off you make while owning the annuity. Generally 15 years plus to your retirement time is the best time to go for a retirement annuity. For anything less it's better for you to take an immediate annuity later with your pension's lump sum and meanwhile invest in other instruments which can earn you a decent interest. This way you will also be able to get tax exempted returns.
Make sure of your liquidity
Annuities are a long term investment instruments. They lock your funds for long durations of time by imposing hefty surrender penalties. So make sure that you're not going to need the amount you're planning to fund your annuity with. It's good to bear in mind inflation and accordingly divide your income to fund your annuity. Some annuities offer the option of withdrawing a small fixed portion for a small amount of penalty however they also cut back on your payouts later on thus offsetting the purpose of planning for your retirement.
Know your payouts ahead
Always have a clear idea of the amount of payout your annuity is going to offer you. Some work with fluctuating payouts while others give fixed payouts. Insurer's past records and credibility also go a long way in ensuring steady payouts. Most deferred annuities guarantee a minimum rate of interest for worst case scenarios.
Read the fine print
That's a rule you should never fail to follow with financial instruments. Certain annuities have clauses favouring the provider over you. Especially, with regards to missed premiums in a deferred annuity. They may even use your compounded principal to pay for an unpaid premium or worst convert your deferred annuity to a reduced amount immediate annuity. So make sure you are aware of all such clauses before you commit to an annuity.
Tax benefits
Tax exemption is a major benefit of annuities if done properly. For registered annuities, the payout after maturity is not tax exempted. So, if your payout after maturity increases your taxable income during your retirement by a significant amount then going for an unregistered annuity would be more prudent. Alternatively, you may also go in for an immediate annuity at a later stage using an accumulated lump sum in which the payouts are tax exempt.