ordinary annuity

Introduction to Annuities

An annuity is a special type of financial product that’s designed to provide a steady stream of income to the holder, usually in retirement. It’s a type of insurance product, which typically requires a lump-sum payment in exchange for consistent payments over a set period of time. Annuities can be used as an investment vehicle, offering a steady stream of tax-deferred earnings over the course of the annuity term.

Varieties of Annuities

Annuities come in a variety of forms and can be used to meet specific financial goals. The main types of annuities are fixed, variable, index, immediate, and deferred.

• Fixed Annuity: A traditional fixed annuity pays a fixed sum on a regular basis, usually monthly or annually. The rate of return on a fixed annuity is determined at the time of purchase and will not fluctuate.

• Variable Annuity: A variable annuity allows the holder to invest in a wide range of investments such as equities, bonds, and mutual funds. The actual rate of return on the investment is tied to the performance of the underlying investments and is subject to market volatility.

• Index Annuity: An index annuity is tied to one or more major market indexes, such as the S&P 500. The rate of return on an index annuity will fluctuate depending on the performance of the market index.

• Immediate Annuity: An immediate annuity is designed to provide an income stream shortly after it is purchased. It can be purchased with a lump-sum payment or a series of payments over time.

• Deferred Annuity: A deferred annuity can be purchased with a lump-sum payment or a series of payments over time. The key advantage of a deferred annuity is that earnings are allowed to accumulate on a tax-deferred basis.

Advantages & Disadvantages of Annuities

Annuities offer a number of potential benefits, including guaranteed income in retirement, tax-deferred earnings, and the ability to pass along wealth. They also come with a few drawbacks, such as high fees, inflexibility, and weak returns.

Advantages:

• Guaranteed Income in Retirement: Many annuities can provide guaranteed income for the life of the annuitant. This can provide peace of mind by helping to ensure that the income stream wont be interrupted by the death of the annuitant or a market downturn.

• Tax-Deferred Earnings: Most annuities offer tax-deferred earnings, which can be beneficial for high-income earners. This means that any earnings from the annuity will not be taxed until the funds are withdrawn.

• Ability to Pass Along Wealth: Many annuities have an option to pass along wealth to a beneficiary upon the death of the annuitant. This can be beneficial for those who wish to leave a legacy for their family after their death.

Disadvantages:

• High Fees: Annuities often come with a variety of fees that can eat into returns. These fees can include surrender charges, mortality and expense fees, and administrative fees.

• Inflexibility: Once an annuity is purchased, it is typically very difficult to modify or cancel. If circumstances change, annuitants may be stuck with an inflexible investment.

• Weak Returns: Depending on the type of annuity, returns can be weak. Fixed annuities typically offer low returns, while variable annuities can be subject to market risk.

Conclusion

Annuities can provide an excellent retirement planning vehicle for those looking for a steady stream of income in retirement. However, it’s important to fully understand the benefits and drawbacks of annuities to determine if they’re the right vehicle for one’s situation. Talking to a financial advisor or investment professional can help annuitants ensure that they’re selecting the right annuity for their needs.

A pension is a regular form of payment made by an employer to an employee after retirement from work. Generally, a pension is paid out on a monthly basis and is also known as a ‘regular pension’ or an ‘annuity’. A regular pension is usually pegged to a person’s salary, typically based on a percentage of the employee’s previous salary.

When an employee begins their pension, typically they are provided with an initial lump sum payment, also known as a ‘pension’ or a ‘one-off payment’. This is usually a much larger amount of money than the monthly pension payments and is used to cover initial living expenses.

The amount of money received from a pension depends on the type of pension plan the person has chosen. Generally, pension plans are divided into two classes – defined contribution (DC) and defined benefit (DB) pension plans. In a DC plan, a predetermined sum of money is contributed by the employer and employee and is invested over time in an effort to grow the pension pot. In a DB plan, the employee’s pension entitlement (the amount they will receive on retirement) is typically fixed at an early date, making it less dependent on the performance of the underlying investments.

The rules around pension withdrawals and contributions also vary between different plans and countries. In some cases, access to the funds may be restricted until retirement or the funds may only be accessible if certain conditions are met. Depending on the jurisdiction, penalties may also be imposed for early withdrawals.

For those who are able to contribute to a pension pot, the regular income that comes after retirement can be an invaluable source of financial security. Understanding how pensions work and the different types of plans that exist is important for those looking to create a secure retirement income.