The Benefits of Buying an Annuity

The Benefits of Buying an Annuity

It is never too early to start thinking about retirement! Whether you’re just entering the job market or are approaching retirement age, understanding and planning for your retirement should be high on your list of priorities if you want to avoid nasty shocks or financial strain in your sunset years.

Buying an annuity can help you secure your financial future and make your retirement the stress free, leisurely experience it is supposed to be. Like many pension plans and schemes, annuities can be confusing for the uninitiated. This guide will help you understand annuities and the benefits they can provide for you and your retirement.

What is an annuity?

An annuity is a retirement income product that you buy from an insurance company with some or all of your pension or savings. Once you have bought an annuity, you are given a guaranteed income for the remainder of your life or for a fixed term depending on what type of annuity you buy.

Essentially, you are given a ‘retirement wage’ once you purchase an annuity that is paid to you monthly, quarterly, bi-annually, or annually depending on your preference and the options available from the provider.

Annuities can last for your lifetime and the lifetime of a next of kin if you wish, or they can be term-certain annuities that payout a fixed income for a certain period. If you die before the end of your fixed term, your beneficiaries will continue to receive payments for the duration of the guaranteed term or they will receive a lump sum.

How much you get per payment depends on several factors including the amount you invest, whether you are male or female, the rates at the time of purchase and what kind of annuity you purchase. Most insurance providers have annuity calculators readily available on their websites to give you an estimate of what you will receive.

There is also the option of having a variable annuity where the insurer invests your money in different products that have a varying rate of return based on the financial climate. In these cases, you will receive a fixed income and you will also receive a variable income that will depend on how well the investments of the insurer are doing. These are riskier than non-variable annuities but can offer bigger monthly payments.

The important thing to remember with annuities is to shop around. You do not have to purchase an annuity through your present life insurance company. You are free to buy any annuity product you want from any insurance company. Make sure to check annuity rates and benefits for each product and seek advice and assistance from a life annuity broker.

• Click Here To Find Out How Much An Annuity Will Cost

Benefits of an annuity

The major benefit of purchasing an annuity is that you will receive an income for the remainder of your life, providing you take a life annuity rather than a term-certain annuity. There is no chance that you will outlive your pension with an annuity as the insurer pays out even beyond your initial investment and for your lifetime!.

With so many different annuity products available for different circumstances, it is difficult to generalize the benefits of annuities. As such, we have highlighted the benefits of each type of annuity below to help you understand which kind of annuity is best for you.

Life Annuity

Financial Security

None of us can predict how long we will live which is why the financial security provided by life annuities is the most important benefit of this kind of product. You will be given a guaranteed income for the duration of your life which means that you won’t struggle in later years.

The guaranteed income is also a benefit in itself. The amount you are paid per installment is agreed by yourself and the insurer and depends on the market and your age and health at the time of purchase. The amount you receive will not change with market fluctuations which is very reassuring in times of national financial crisis.

To avoid getting stuck with low installment payments, you can purchase an inflation-linked life annuity which allows your payments to rise. This is a good option if rates and market conditions are low at the time of purchase.

Deferred Payments

When purchasing a life annuity, you can choose to defer payments which means that they won’t start straight away. This also means that your payments will be higher because you will receive fewer payments over your lifetime. If you have personal savings that you plan on using for retirement first, a deferred annuity can offer financial security for your later years where you may need to pay for health care costs or perhaps accommodation.

Death Benefits

Some insurers allow you to confer the benefits of your annuity on a beneficiary after you have died. This can be in the form of a lump sum payment or regular payments.

Another form of death benefit is a joint or survivor annuity where your lifetime payments are paid to a spouse or other beneficiary for the remainder of their life. This is often a good choice for couples who wish to support their spouse after death. You can, with certain insurers, choose a third-party beneficiary to receive your payments if you wish to support a charity or organization.

One thing to consider when deciding whether to buy an annuity with a guarantee is that your lifetime payments will be smaller as the insurer will be paying out over a longer time.

Term-Certain Annuity

Higher Payments

These products pay a guaranteed income over a specified period. Commonly these annuities last for 10, 15, or 20 years. The major benefit of these annuities is that your payments are higher as the insurer is paying out over a guaranteed period only.

Guaranteed Term

If you purchase a term-certain annuity you have the option of leaving your payments to a beneficiary for the remainder of your term should you die midterm. This is called a guaranteed term.

For people with health-related conditions that may limit their lifespan, a term-certain annuity with a guaranteed payout for beneficiaries is a good way to ensure that your next-of-kin are taken care of following your death.

Variable Annuity

Risk and Reward

These are a riskier form of annuities as they are intrinsically linked to the market conditions and the investments of the insurer. However, they can offer bigger rewards.

With variable annuities, you get your secured fixed income with the bonus of a variable income as well. The amount you get from your variable income will depend on how the investments are performing. If the investments are doing well you could see yourself getting a significant additional income through the variable annuity.

Of course, as with all investments, you run the risk of getting less than what you expected if the market behaves poorly but you will always receive the fixed income no matter what the state of the market.

Summary

The benefits of annuities are as follows:

• A fixed income for your life or agreed term.
• Option to transfer payments to a beneficiary after death.
• No risk of outliving your savings with life annuities.
• Lots of different options to suit your circumstances.
• Potential to earn more than you saved depending on your lifespan.

If you are looking for financial security, and a regular income that you can depend on and budget around, annuities can be a great choice. Even though you are locked into an annuity there is flexibility in the number of different options available. This means that in many cases you can tailor your annuity product to fit your personal needs.

As with all major investments, you should seek advice from a life annuity broker and other independent advisors to help you make the best choice. Speak to them about how annuities can work for you and what options would be advisable for you.

• Click Here To Find Out How Much An Annuity Will Cost