One important financial decision that has to be made at some point in one’s life is how to plan for retirement. There are many different options available for retirement savings, and one of them is purchasing an annuity. Many people put a portion of their retirement savings (typically one third) into an annuity, especially if they have already used up other forms of tax efficient investments.
Insurance companies offer various forms of annuities to help you to build up some capital for your retirement in a tax-efficient manner, and then provide you with regular payments for a fixed number of years, or for life. There are also options for joint-annuities where your spouse, or other beneficiary, can benefit from this if you were to die before receiving the value of your initial payment.
Retirement savings do not all have to put into annuities – you can also divide up your savings, and purchase an annuity as a supplementary form of income for when you retire. It would be wise to calculate what your needs are over and above other pensions that you may be entitled to. Sit down with a financial advisor and plan what your assets are, your debts, your living expenses, etc. and plan wisely.
Two forms of annuity could come into play when planning retirement – you could buy an immediate annuity, or a deferred annuity. If, on retirement, you receive a lump sum, or sell assets, you could use that lump sum to purchase an annuity, and guarantee that you have regular payments made out to you, starting immediately. An immediate annuity usually gives a higher level of income over a lifetime.
On the other hand, as part of a long-term retirement savings plan, you could put money into a deferred annuity, which you cannot benefit from before the age of 59 ½ without incurring hefty fees and penalties. You can put as much money into this as you wish without having to pay tax on this money. You only pay income tax on the money when you get the money out.
A variable annuity could be a sound investment for part of your retirement savings as you get the benefits of a guaranteed income on retirement, with the added benefit of being able to invest that money into various stocks and bonds. If these perform well, you can get a healthy return on your investment, while at the same time maintaining the security of a minimum regular payment.
On the basis of advice from a trusted financial advisor, you may have already invested the maximum allowed in other tax-deferred options, and decide to also avail of an annuity. Be sure to read the fine print when it comes to mortality charges, expense charges, and surrender charges. Also make sure that all your retirement savings are not tied up in annuities, and that you have enough money put aside for any lump sum or emergency payments you may need to make.
To sum up, an annuity can be a great way to supplement your retirement savings in a way that is tax-efficient, and can give you a guaranteed income for the rest of your life.
