A Guide To Buying An Annuity
When you use an annuity as an investment vehicle you basically invest now to get an income later. These products are designed to provide a regular source of income based on the investment that you have made over time or as one or more lump sums.
In many cases people will buy annuities as a source of retirement income. Sometimes this has to be done because this is the way that your pension plan has been set up. Other times this is done by choice. Other reasons for buying annuities are simply as part of a wider investment portfolio and, in some cases, you may be given access to annuities without actually buying them for yourself.
So, for example, if you take up a structured settlement compensation deal after an accident then the income that you are given will usually be annuity based. The company that is paying out to you will set up annuities to make the regular payments that you negotiate with them.
The way that you pay for your own annuity will vary. If you, for example, simply opt to buy an annuity with a lump sum of cash that you have spare as an additional investment then you can buy the annuity up front.
It is, however, more often the case that you will make regular payments into a fund that will ultimately be used to pay for the annuity that gives you an income when the fund matures. This kind of payment plan is most often used in pension funds and in the purchase of deferred annuities.
If you do pay for your annuity in installments then you may well be faced with a choice of which annuity product to ultimately ‘buy’ when your fund matures (i.e. when you retire). You may find that you have to go with an annuity that your pension company or insurer gives you or you may be allowed to buy on the open market.
Most experts will recommend buying on the open market if you can. Annuity payout rates vary widely in the sector and you could simply find yourself getting a better rate of return by shopping around than by taking the first annuity that you are offered for your money.
Bear in mind that your age and health may play a part in the annuity you can choose here. You’ll often actually get better rates of return if you are in poor health than in good physical shape. This is based on the fact that the annuity provider has a good chance of not having to make as many payments as their statistics will give you a lower life expectancy than somebody in perfect health.
Finally, you should also consider when you actually start taking payments on your annuity. Many products here will make higher payments if you defer taking your income for a few years if you are allowed to so this may also be worth considering if it is financially viable for you.
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