An annuity can be considered an important part of your retirement investment portfolio. This is an insurance product that requires you to invest a lump sum at the beginning of the contract. The respective insurance company guarantees to make regular payments against that money in future. However, prior to investing in a life annuity, you must know its features and the proper buying procedure.
10 important steps
If you’re interested in annuity investment, you may go through these 10 steps to ensure effective investment of your hard-earned money.
1. Shop around – This is the first step towards buying a good annuity plan. You can start shopping with a life insurance provider, a bank, a brokerage house, a mutual fund company or even a non-profit financial organization that sells life annuity products.
2. Know about annuity options– There are basically two types of annuity plans – fixed annuities and variable annuities. Learn in detail about both of them and compare them, in terms of benefits and drawbacks. It would help you make an easy decision on which you should go for.
3. Learn about fixed annuities – Fixed annuities ensure a guaranteed payment in future. If you don’t want to play any risky games with your savings, then this would be the best option for you. The return on fixed annuity investment is low, as such annuity plans use actuarial table considering an individual’s life span to be 100 years.
4. Learn about variable annuities – In case of variable annuity, you have the choice of selecting your options. You can arrange and manage your portfolio as per your own wishes. It means you can invest in mutual funds, stocks etc. through a variable annuity. The payment that the annuity provider would disburse depends on your capital. With such an annuity you can grow your money tax-deferred.
5. Know when to invest – Invest your money during accumulation periods and get payments during payout period.
6. Know tax implications – You don’t need to pay any income tax, unless and until you withdraw the money. But when you start withdrawing your income during the payout period, you need to pay regular income tax.
7. Know the penalties – If you want to withdraw any funds from the annuity before you meet the age of 59½, you may need to pay the Inland Revenue a penalty along with the taxes you’re liable to pay. The insurance company has the right to assess the surrender charge if you opt to take out the money within a short period after you deposited the money. However, it can be as long as even 10 years.
8. Choose the beneficiary – You need to choose a beneficiary who can get the payment as death benefit, in case you die prior to the payout period.
9. Know the other fees – You must know about the other fees related to an annuity. Such fees may include mortality and expense risk fees and administrative charges. Ask your insurer to provide you with a comprehensive list of fees related to an annuity.
10. Consult a tax advisor – You must consult a tax advisor before you buy an annuity.
These steps are very important, in terms of buying an annuity. If you want to invest in variable annuity, make sure you check the annuity’s previous performance.
Jonny is famous for his finance, insurance and annuity related write-ups . He writes on behalf of online communities such as My Pension Expert.