Basics Of annuities and their Types!
Since annuity are so often understood as an investment, I would have to give people who otherwise might give up a great investment opportunity for a better understanding of this idea.
What is the annuity?
In other words, the annuity is an investment in products that are part of the financial soundness of insurance and guaranteed by the insurance company. If a word is mentioned in the insurance, but many people are willing to invest in the money boxes. After all, what they want investment and insurance. What does not realize is that ultimately it matters that the money you spend with the company has the potential to achieve the best results for the risk taken. Annuity can be.
In other words, if your company’s annuity is ready to offer you a rate of 5% (net of all costs) which is guaranteed for five years and on the other hand your bank or investment fund offers% $ 4.5 (net), which would you choose? Believe it or not, many choose to plan rates by 4.5%, just that it did not mention the word structure of the insurance program that is all. Sounds crazy, right? We also believe! And in times of turbulence in stock markets and low bank CDs, annuity can be a good alternative of investment. Annuity are to offer some protection against market slump, may provide guaranteed returns on investments grow tax exemption until you withdraw money.
Lock period
An important aspect of annuities is the closing period. This is exactly the time that you agree to keep their annuity plan from that company. You can withdraw from the annuity before the expiry of the warranty period, but you can make the death penalty (which varies). In other words, if you choose annuity for five years, it is decided to cancel the program after two years you may have to pay a fine of 3% (variable). This penalty can be applied to the amount initially invested or the original amount invested, plus interest accrued during this period. Closing period or redemption fees must be described clearly in the contract to your benefit. Despite 10 years of policies are more popular and brokers, we do not recommend you block your policy for more than five years. Some plans offer annuity option rate of 5% to 10% free withdrawal during the lock period.
Types of annuity and their features
* in a fixed annuity – it’s kind of annuity which is often called a annuity or an interest-only annuity. About These annuities, the insurance company guarantees a minimum rate of return on time. Warranty periods are most common for four to ten years, but you may have also seen, the responsibility of one, for two or three days. They are often used as an alternative to bank annuities.
* Increasing annuity – an increase of annuity only offers bonus time between the application and the following reports. So if you invest 100 000 paid 10% of the value of your retirement annuity which is now $ 110,000. In addition to a premium over the vesting period! For example, an annuity fee by 10% from October to December period is often a final end. Bonus payments are often made for those people who have lost their money in other investments which is a way to try to compensate for the loss.
* Index type of Annuity – this annuity is relatively new; it is an excellent addition to annuity portfolio. Indexed annuities may be a bit tricky, and choosing one can be confusing. For simplicity, we can not include all options in this article, but simply an index annuity is a fixed annuity that credits interest based on the performance index (as opposed to fixed rate). For example, indexed annuity, which offers a 60% share in the S & P 500 index, you can credit for 60 percent of profits annually from index. If the measure of earnings is the end of the year is 15%, you will be credited with an interest rate of 9% (an increase of 60% of the index). An important aspect of the annuity attached to it is that as long as you keep the entire period you have selected, you can not usually lose their capital gains.
* Retirement Annuity – This annuity is especially popular with seniors – ages 65 +. As the name suggests, the main purpose is to provide annuity income. As annuities to the CPI, annuities offer many options. The most popular option, however, is the possibility of life in return. With this option, if you deposit the money to the insurance company, insurance, this in turn ensures a certain income for life. Annuity income payments can vary widely and it is very important to go through about many plans and options before sending your hard-earned money on the insurance company. In a few annuities, if you agree with the policy, the money can be locked in the same business. Make sure that you choose the right type of annuity from right type of Insurer Company.
* Variable Annuity – this type of annuity can be prompted for the creation of indexed annuities. Simply for example, a variable annuity is a fixed annuity with variable investment option and hence the performance variables can build mutual investment funds, bonds and variable annuity are the most complex of all the annuity and suggest that you ask many questions and talk to several agents before making a final decision. Although you can cancel the annuity at any time, sanctions may be mentioned in the most important assets. It may be possible to lose large amounts of money in variable annuity if you don’t choose the right type of variable annuity with right options.
Annuity Not To Be Forced At 75 from April 2011
The Government has planned to take the rules back, according to which most people had to take pension at the age of 75. Pension is an income for life time, however many savers rate it to have poor value.
After this plan of the Government, the pension savers will have more options about changing their funds into an income for lifetime.
The new plan will be effective from April, 2011 and after that 75 would no longer be a compulsive pension age. This will allow the people to draw an annual income.
The new plan will set a cap for the maximum income to be withdrawn for those with modest pension, so that their all funds are not over in one go only.
However, this is not so friendly with the wealthy people, as they won’t have any cap for their withdrawals and also, they will have to pay taxes on their every withdrawal.
According to the present plans, a person cannot keep his pension invested for period longer than the age of 75, and also there are rules that he can withdraw a particular amount of income. It also requires a tax payment of £82 of every £100 detained at the time of death.
After the death of the saver, the pension would be given to the dependant.
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DailyBreeze.com – SCOTT BURNS: Do your math homework when choosing an annuity
This is a great article By Scott Burns – Enjoy !
Q: My wife and I recently went to a “free dinner” to get educated on the best way to manage our money for retirement. I’m 66 and my wife is 65. Together we get a little over $50,000 a year in Social Security and pensions from former employers. Our home is paid for and, living in Texas, we don’t have a state income tax to worry about. I have a 401(k) with about $150,000 in DuPont stock and around $350,000 in a “stable cash fund.” The stable fund is paying about 4 percent. I also have a 403(b) with about $225,000 spread over three Vanguard funds and about $110,000 in a taxable account with three Franklin Templeton funds.
The adviser has recommended moving a significant amount of this money into annuities. She was recommending $100,000 into a 10-year annuity with a 10 percent signing bonus and guaranteed increase in value of 8 percent a year. You are allowed to withdraw up to 10 percent per year after the first year without penalty. Her commission is supposed to be paid by the company and not from our proceeds.
Maybe I am just naturally skeptical, but I’ve always believed that if it sounds too good to be true, you should run away as fast as you can. My wife is more accepting of all these claims, especially since she has less tolerance for market ups and downs.
A: There is no free lunch. No free dinner either. While it is true that the salesperson’s commission is paid by the insurance company and 100 percent of your money is invested, I assure you that the insurance company does not look to the tooth fairy for recovery of its marketing and sales expenses.
The salesperson’s commission and related marketing costs are a cost of doing business. That cost can come out of two places: from your original investment or from the return on your investment. Either way, it’s out of YOUR pocket.
How it comes out will depend on how long you own the product. The insurance company guarantees that it will recover its marketing costs by writing a surrender charge into the contract. These surrender charges vary, but typically range from 6 percent to 8 percent. The percentage typically declines by 1 percentage point a year.
So if you are charged a typical 1.25 percent a year for “mortality and risk” and the company has a 7 percent surrender charge, the company will recover 1.25 percent plus 7 percent if you surrender after one year (8.25 percent total). After two years, it will have collected 2.5 percent in “mortality and risk” fees, plus 6 percent in surrender charges, a total of 8.5 percent. After three years, it will be 3.75 percent plus 5 percent (8.75 percent total), etc. If you don’t redeem early, the company eventually recovers the marketing costs through the annual mortality and risk charge.
I am not alone in believing that most variable annuities have expenses that far exceed the benefits. This includes those that offer a “living benefit,” which guarantees an annual income regardless of what happens to the value of your investment.
Rather than consider what you are guaranteed, you should consider what the insurance company is guaranteed – it will collect fees equal to about 3 percent of your principal each year for as long as you hold the contract. You get the right to withdraw at 5 percent, regardless of account value. What this amounts to is de-facto life annuitization because the odds are that your account will not appreciate to increase your income.
You could have more income, today or after some time period, if you simply chose to buy a joint and survivor life annuity. That choice would also increase your income over the amount you would receive from the product you have been offered.
Here is a link to an earlier column relating more of the details: http://assetbuilder.com/PVHTZB.
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Questions about personal finance and investments may be sent by e-mail to scott@scottburns.com
InvestmentNews.com – Market rally cut into sales of fixed annuities in 1Q
First-quarter fixed-annuity sales in the U.S. were down 52% from the year-ago period, falling to an estimated $16.7 billion.
“A ton of money was flowing into equities to the detriment of other sectors, including annuities,” said Beacon Research president and chief Jeremy Alexander. “There was the feeling in the first quarter that the market would continue its increase.”
Market-value adjusted and book value annuities took the hardest hits, with sales dropping by 25% and 24%, respectively.
Not surprisingly, carriers felt some pain during the quarter. Western National Life, an AIG company, relinquished its position as the top seller of fixed annuities, slumping to fourth on the list during the quarter, according to Beacon Research.
New York Life Insurance Co took the top spot for the quarter. New York Life’s sales were driven by the carrier’s book value fixed annuities — namely the NYL Preferred Fixed Annuity. Book-value fixed annuities pay a declared interest rate for a stated period.
Allianz Life Insurance Company of North America climbed to second place from third, while Aviva USA jumped to third place from fifth. American Equity Investment Life Insurance Co. rounded out the top five.
Allianz’s MasterDex X, an indexed annuity, was the top-selling product during the first quarter.
Broken into channels, the top-selling product among independent broker-dealers was Massachusetts Mutual Life Insurance Co.’s RetireEase income annuity. Regional and large broker-dealers preferred New York Life’s fixed annuity, a book value product. Meanwhile wirehouse producers went with John Hancock’s managed fixed-annuity, an income product.
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BelfastTelegraph.co.uk – Finding your right annuity will inevitably pay dividends
The purchase of an annuity is one of the most important financial transactions in the lives of most working people.
Yet it is a subject that tends to confuse — perhaps because people avoid thinking about retirement planning in the same way they try to ignore the idea of getting old.
An annuity is the income a person receives in retirement. The amount of income received from the annuity obviously depends on the size of the pension pot, but other factors include who the annuity is obtained from, and the market rate at the time of retirement. Ideally, a person should convert their pension into an annuity at the right time — when annuity rates are favourable.
Annuities are in the headlines at present, because one of the first acts of the incoming Conservative/Liberal government has been to scrap the obligation to convert a pension pot into an annuity by the age of 75.
There have been good reasons why governments have required elderly people to take out an annuity — it reduces the risk the state may be left to subsidise them through benefits in old age. But it can also make sense for someone to use their pension pot without converting it to an annuity.
A person who is critically ill may want to use it in the short period of time before they die. Alternatively, a pensioner might want to buy investment assets with it to generate a higher income than the annuity would provide.
Annuities are complicated — which is why it is important to take expert professional advice. Sadly, very few people do.
A survey just published by Prudential found that a mere 19% of people planning to retire this year intend to take financial advice on converting their pension into an annuity. Yet the cost of accepting a poorly performing annuity can be very high.
About 60% of people who retire accept the annuity that is linked to their existing pension plan. This is despite the fact that under the ‘open market option’ they can usually shop around for the best annuity on the market. They may also be able to delay the timing of their retirement to match a point when annuities offer a better rate.
Aviva is about to launch a TV advertising campaign explaining the benefits of going to the market for the best annuity — it claims that this may boost retirement income by 20%. For someone with even a fairly modest pension pot this might provide an extra £1,000 a year — which might add up to £20,000 over the rest of their life.
There are now a wide range of web comparison sites that allow people to evaluate the annuities on offer — rates on offer vary not only according to providers, but also depend on other factors, such as personal life expectancy, and whether the pensioner intends to take an initial cash free lump sum.
But whatever advice is taken, the painful truth is that annuity rates are poor at present. Over the last 18 months, annuity rates have fallen by about 13%.
Traditionally, annuity rates have broadly tracked the rates paid by gilts (government bonds). That link seems to have been broken in recent times, with annuity rates falling even while gilt rates rose.
“There are a number of factors in play at present, all contributing to a decline in annuity rates,” says Tom McPhail, head of pensions research at advisors, Hargreaves Lansdown. “Improving life expectancy continues to force insurers to adjust their pay-out terms, as they have to stretch the income payments over longer periods. They don’t know when, or indeed if, this trend will run out of steam.”
In addition, says McPhail, people with serious health conditions are increasingly opting for individualised annuities on enhanced terms. The effect of this is the end of their ‘subsidy’ of the general annuity pool. Meanwhile, investment risk has risen and returns, generally, have fallen.
It has become a bad time to retire. The real question, though, is whether it will ever again be a good time to retire.
FinancialPost.com – Annuities for Dummies
Annuities are a seemingly dull topic that most baby boomers would not have been interested in during the rah-rah years of the stock market. But as Friday’s post on alternative investments — Beyond Stocks and Bonds — showed, there are reasons to investigate all options. This is especially apt when you consider the first wave of baby boomers born in 1946 turn 65 on January 1, 2011. 65 is of course the traditional retirement age.
As an experiment, I’ve handed over the weekend read here to financial advisor Sharon Smith, who expressed an interest on writing on this topic. Her perspective is American — she’s associated with the California-based Oak View Law Group — but most of the concepts apply here too.
Note there are a few cross-border differences. According to Vancouver-based certified financial planner Jeff Swanson, in Canada, annuities don’t allow investments to grow tax-free — unless they are registered, in which case tax will eventually have to be paid. “However, a type of annuity referred to as a ‘prescribed annuity’ definitely provides some tax advantages.”
In any case, keeping in mind the American focus, Sharon’s piece — including subheads and the main title “Annuities for Dummies” — begins as usual across from and below her photo. I’ve lightly edited it where necessary.
Over to you, Sharon!
Are you close to your retirement, with most of your money in low-interest savings accounts? Are you looking for a guaranteed source of income for your post-retirement life, but do not want to indulge in risky investments? Then an annuity would just be the apt thing you are looking for – your key to a secure and comfortable retirement!
What is an annuity?
An annuity is a contract between an individual and an insurance company. According to the contract, the individual pays a certain amount of money regularly over time to the insurance company. The money gets invested this way. And once the individual retires, he/ she starts receiving regular payments from the insurance company for the rest of his/her life.
Though annuities have a reputation as complex and difficult financial vehicles, you need not be a financial expert to grasp their workings. Even dummies can venture into them. They are one of the best ways to ensure a quality future.
How to decide whether annuity is the best financial instrument for you
The right combination of annuities can fetch you more income out of your savings that any other financial instrument. But this would require you to zero in on the following as you decide to invest in annuity:
- Identify the kinds of annuities: The first thing you must determine is what kind of annuity you require.
The options available vary, depending upon the payout timing, investment type and liquidation option.
You get immediate and deferred annuities based upon payout timing. In an immediate annuity scheme the investor begins to get payments immediately upon investing. While in a deferred annuity, you typically start receiving your payments at retirement.
Depending upon investment type, there are also fixed and variable annuities. Fixed annuities offer a guaranteed rate of return, whereas returns on variable annuities depend on market performance.
Depending on liquidation options, there are also annuities with withdrawal penalties and annuities without withdrawal penalties.
- Fathom the pros and cons of annuities: It is important to understand the pros and cons of annuities before investing in them. It minimizes the complexities of your investment.
Here is a glimpse of some of the advantages and disadvantages of annuities.
Advantages:
- Annuities are a steady source of income for people who feel their resources might get exhausted over time.
- Annuities allow investments to grow tax free.
- Annuities can be modified as per your requirements.
- Annuities are backed by state guarantee funds, hence your investments are not lost even if the company fails to pay your return.
Disadvantages:
- Annuities are meant to provide a steady income over a period of time. But they are of no use when you are faced with sudden expenses, involving a high amount.
- A fixed annuity does not generate the sudden gains like those available in the stock market.
- Funds that are withdrawn before time are subject to a tax penalty of up to 10 per cent.
- They require payment of sales charges and surrender charges.
- Figure out the total payment you need to make: You must always figure the amount you are supposed to commit in the whole process. That gives you a fair idea of how much your investment is going to be. That in turn would help you to calculate your gains on the returns.
The sudden halt to the monthly flow of cash post-retirement often becomes a depressing experience. Much to your annoyance, you cut down on your expenses to get yourself going. Under such circumstances people may even be forced to take out unsecured loans to make ends meet.
However, a wise investment in annuities can help you to avoid such unpleasant situations. A debt-free life would not only keep you miles away from debt woes and expensive consumer debt relief programs, but also retain your clean credit record.
Read more: http://opinion.financialpost.com/2010/05/15/annuities-for-dummies/#ixzz0oCGA97wE
FairInvestment.co.uk – Annuity Sales Up at Just Retirement
Annuity sales at Just Retirement have soared by 87 per cent during the first quarter of 2010.
New annuity business at the enhanced annuity and equity release provider increased to £238.6 million, up from £127.5 million for the same period last year.
Year-on-year new annuity sales rose to £587.9 million until the end of March this year, up from £399.6m for the same period in 2009.
Just Retirement CEO Mike Fuller said: “The growth in sales was achieved as a result of a combination of factors, including increased overall annuity market activity helped by steadily increasing stock market values.”
Just Retirement has also reported a further improvement in the awareness and understanding of enhanced annuities by Independent Financial Advisors.
But despite a doubling of the enhanced annuity market from 9 per cent in 2005 to 18 per cent in 2009, only 36 per cent of annuity clients take the Open Market Option (OMO).
And Just retirement has also discovered that only 8 percent of pension savers improve their retirement incomes by taking an enhanced annuity, which offers a greater retirement income for people with health problems or certain conditions.
To help people maximise their retirement incomes, Mike Fuller has suggested three ways to increase the use of the Open Market Option pensions, which includes, improving communication throughout scheme membership, speeding up service efficiency and streamlining the application and advice process.
Adding: “These three solutions would significantly increase the take up of enhanced annuity products, boosting pensioners’ incomes and living standards.”
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