Sunday 23 December 2012

How To Choose The Best Annuity For Yourself

By Michael Leaks


Many people want to secure their finances when they retire by choosing to pay in advance a specific amount of money. This can be done in a single tranche or by paying several tranches repeatedly. When time comes to retire, that person receives a monthly sum of money that is called an annuity.

An annuity, regardless of whether it is a fixed or variable plan, is exempted from tax. There is an exception for the immediate annuity, where an annuitant receives his premiums immediately or within a year that he starts paying. This is due to the rule of annuity that any accumulated earnings, whether they are from interests or dividends, or even financial gains obtained from the growing investments are tax deferred in nature unless the capital funds or earnings from interests are cashed out.

Even though, the annuities are tax-deferred until the time when the investor starts to withdraw their earnings, but there is another additional penalty. Except in some special conditions, normally if an annuity holder wants to withdraw earnings before the age of fifty nine and a half, he has to pay a certain additional amount as a penalty.

A variable annuity account holder commonly receives a death or survivor benefit. The benefit should be equivalent to the greater of the present market value of the variable annuity, or it can also be equivalent to how much fund that has been paid prior to the date of the account holder's death (minus any cash-outs, if any). When a person dies before he reaches the payout period, which means he dies before the first premium is received from the insurance company, those who are listed as his beneficiaries will be paid with the accumulated amount of funds available in his annuity account. The advancement of an annuity is commonly controlled by the general income taxes and death duty.

Primarily, the annuities are divided into two types of annuities, variable and fixed. The division between annuities is based on the risks involved with the each type of annuity. The first and most risk free type of annuity is fixed annuity. In this type of annuity, insurance company takes responsibility of all the risks involved but the guaranteed amount in return is normally low if compared to other types of annuities.

Things are different though when it comes to a variable annuity. All the risks are on the behalf of the holder. The reason why people accept these risks is the possibility of getting more money in the long run.

Under fixed and variable annuity segments, further sub-segments termed as the immediate annuity and deferred annuity are found. Both terms are used to identify when the average earnings should start.

They divide further in many variations, each of them having specific characteristics that set them apart from the others.

With so many options available, it is highly advisable to contact a financial expert before making any decision about investing in certain type of annuity. Many investors with little financial knowledge find themselves confused while deciding about investing in annuity. Seeking advice from an expert can help people to negotiate better deals out of different annuity investment plans. With such investments, a mistake can ruin the lifelong savings of a person.

There are some factors that need to be taken into account when choosing an annuity. The age, inflation perspective, income needs for the future and the assets are of primary importance.

In case of retirement investments, some annuity types are specially designed for such type of investments with better results for retired people. A simple example is of a fixed annuity, in which investment from a 40 year old is nothing but a mistake. At the age of forty, it is expected from a person to increase assets instead of depending on the fixed income by avoiding investment risks.

Senior citizens are different because they are in need to find ways to protect their assets without any risk involvements. At the same time they can be sure that perpetual income can be obtained throughout their entire years of retirement. This being said, an annuity is safe to choose and thus it's a viable option for these senior citizens.

Annuities can be best possible options for the people who are retiring in near future or are already retired, if carefully combined with some other retirement planning investments. People may choose between deferred annuity and immediate annuity based on the years left in retirement. Deferred and immediate annuities are best suited when combined with other popular investment schemes.

An investor should consider his age before investing in any risky annuity programs. Those who still have a number of years before retirement may likely be able to recover from financial losses derived from risky investments. People who are retired are often more selective and cautious. However, if a person hasn't been saving when he was younger, he may opt for riskier annuity programs in hopes that he could cover the needed amount of fund in the short time that he has.

As time passes, there is a great chance living costs will raise due to inflation. If you want to avoid any problems like this one, it is recommended to take a COLA, which stands for a cost of living adjustment. This way, inflation will not affect your standards of living.

To make a most comfortable annuity decision, the factors that must be researched properly are inflation projections, size of assets and the future financial needs. Depending upon these factors along with the cash-flow analysis over life expectancy, a person can choose any annuity that can best suits his or her interests.




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