There are lots of different ways to invest your hard earned cash in order to enjoy a regular income in later life. You could stash your savings in a pension fund or some other type of investment vehicle, or you could choose to deposit a lump sum in an annuity fund in return for a regular income. So if the annuity option is an attractive one, what are the pros and cons of immediate annuities and how do they work?
An annuity is an insurance policy that allows you to pay a lump sum in return for a regular income. There are several different types and terms of annuity investment: fixed, variable, and inflation adjusted. Income from immediate annuities is calculated based on the lump sum you are investing and your estimated life expectancy. Or in other words, the insurance company is betting on how long you last, so the longer you live, the more the insurance company loses out. But although annuities are a popular form of investment for the over 55s, what are the pros and cons of immediate annuities?
What are the pros of immediate annuities?
1. An immediate annuity will give you a guaranteed investment for your money, which is an attractive option for those who are in their twilight years and have no desire to risk losing their nest egg in the volatile stock markets.
2. Immediate annuities provide a safe and reliable income, which is perfect when your outgoings are fixed and unlikely to dramatically change.
3. Immediate annuities are normally guaranteed by governments, so as long as you don’t invest massive amounts of cash into one policy, your money should be safe and your payout guaranteed no matter what happens to the insurance company.
4. Immediate annuities are a very simple investment, which makes them perfect for anyone who has very little financial acumen and no desire to learn.
5. Thanks to the wide range of different types of immediate annuity policy for investors, no matter what your circumstances, you should be able to find the right policy to suit your individual requirements.
6. Investing in the stock market is always an uncertain proposition, but if you plough your nest egg into an immediate annuity, you have the bonus of a guaranteed income no matter what happens to the world financial markets.
What are the cons of immediate annuities?
1. The younger you are, the lower your monthly income from an immediate annuity will be—insurance companies weight the policies in favor of older people because younger people live longer and the insurance company makes less money from them as a result.
2. An immediate annuity policy is a contract, so once you have signed on the dotted line and handed the money over, you are stuck with it. With this in mind, it is not a good idea to tie up ALL of your assets in an immediate annuity—always keep some money free for use elsewhere.
3. You can choose to protect your investment against the risk of inflation, but this will cost extra.
4. Unless you buy a policy that is designed to provide an income to your spouse or heirs upon your death, if you die sooner than expected, the remaining balance of the investment goes straight into the insurance company’s coffers.