Which type of annuity is an investment for you?
How do annuities work?
Annuities are the main way of turning a pot of cash into an income stream. In very simple terms, they work like a life insurance policy in reverse—you pay them a lump sum upfront, then they pay you regularly until you pass away.
What are the risks involved?
There are two specific types of risk with annuities. The first is the risk that you pass away early and don’t receive as much money back as you paid upfront. This is a risk you’ll need to consider when purchasing an annuity.
Available in fixed and variable options.
The second risk only applies to some annuity types. You may get some that pay a fixed amount, often based on factors such as your age, gender, and health status when you buy the annuity. However, you may also get variable annuities in which the insurer invests the money, meaning the amount you receive depends on the performance of the investments. To mitigate this risk, you may opt for the middle-ground of an index-linked annuity. Here are some examples of the different types of annuities:
- Immediate annuities offer immediate lifetime payout.
- Deferred annuities provide guaranteed income at a future date.
- Fixed annuities are determined by guaranteed interest rates.
- Variable annuities let you invest money into other accounts.
Should you invest in an annuity?
Whether annuities may be for you and what level of risk is appropriate will depend on your financial circumstances. You’ll also need to carefully consider the tax implications, particularly if you want to retire early.
Considering an investment in an annuity? Contact us to discuss your options.
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