How to reap the best out of an annuity?
Based on the type of payout of the benefits, annuities are classified as immediate income and deferred income (that includes fixed payment, variable payment, equity indexed) annuities. Although annuities provide tax benefits, there are a lot of costs involved in it when compared to traditional investment plans. Once the investment type is chosen, it is important to consider other aspects of investing in annuities to earn the best income.
- Expenses involved in an annuity are surrender fees, commissions and monthly fees.
- Payment for purchase of an annuity can be done through single or series payments or through social securities.
- Costs involved on early withdrawal may include annuitization, systematic withdrawal or lump sum amount.
The benefits payout options is also another aspect that needs to be looked into to earn maximum income. These can be broadly categorized into three types:
- Guaranteed period payment: The return of the principal (initial investment) and the interest will be paid back by the insurer within an agreed period of time. It may be paid back in series or as a lump-sum amount. Here, the investor can be sure of getting back all the benefits within a certain time or while he is alive and the insurer does not retain back any of the earnings of the investor in case of his death.
Apart from providing benefits of tax deferral, fixed payment annuities also offer a slightly higher rate of growth due to the following reasons:
- The surrender charges usually reduce with increase in number of years as compared to IRS.
- Maturity is usually between one to ten years and mostly there will be automatic renewal unless voluntarily withdrawn.
- Rate of interest will be updated with the current rates at the time of renewal.
After making a comparative analysis, deferred income annuities seem to offer a guaranteed retirement income. These annuities pay around 3-4% higher than a standard 10 year treasury bond. Also, some tax rules allow consumers to invest 25% or up to $125,000 into an annuity. But this required IRA withdrawals to begin after completing 70.5 years of age and income to be withdrawn by the age of 85. These are often called as qualified retirement plans and are regulated by ERISA. Any qualified plan must provide annuities in the form of SLA (Single Life Annuity) and a QJSA (Qualified Joint & Survivor Annuity).
