Annuities are an important aspect of a person’s retirement income and should be a serious consideration as far as financial planning is concerned. An annuity can be purchased either from an insurance company or by making regular deposits over time into a pension plan.
When it comes to buying your annuity there are several variables to consider which can have a significant impact on your retirement income, so it is important to consider the options.
Three types of annuity
The three standard types of annuity package are; fixed, variable and indexed. The main difference between each type being how your money is invested and what level of risk you are taking on.
Fixed annuities
This is where you earn a set interest rate for the duration of the annuity. In doing so, you are guaranteed a certain level of income over a specific length of time. This is of course a low risk option, and as such the yield is generally lower than with other annuities.
A few insurance providers offer Guaranteed Annuity Rates, which means that you are guaranteed your principal investment being repaid in full. Market value adjustment annuities do not offer this guarantee – so if you want to withdraw your money early you may end up receiving less in total than you originally put in.
Risk
With a fixed annuity, the annuity provider takes on all of the risk, so it makes sense that you would receive a lower rate. You should also keep in mind though, that the company will effectively own the principal – so if the annuity provider goes bust, you will lose your income.
A variable annuity is of course higher risk and it’s performance generally depends on the performance of the stocks it is pinned to. If your stocks are invested well then you are likely to get a much higher income than with a fixed annuity. On the other hand, you might not…
An indexed annuity is a mix of the other two types – it allows your stake to be invested in stocks whilst also reducing the risk and potentially raising the returns compared to a fixed annuity.
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