Annuity 101

Investors worried in search of safe havens have faced many considerable challenges in recent years. The declining value of the stock market value of residential properties and CD interest rates, as well as meager savings accounts,  has reduced the ability to save and protect against inflation.

This is one of the several reasons why many people who are approaching retirement or retiring are turning their income into a stable and guaranteed source of income. But with so many types of rents proposed and a complex set of rules, tariffs, and restrictions, it is not uncommon for investors to buy products that no longer meet their needs.

Here is a concise overview of how an annuity works and what we need to keep in mind:

An annuity is an insurance commodity that you buy and pay for rent. You usually make a fixed payment or a series of payments to the seller, often an insurance company. Instead, the company agrees to make regular payments over a specified period (say ten or twenty years) or indefinitely in two ways:

• Life annuities start paying benefits the year the money is deposited. The amount of the payment is based on factors such as the amount you invest, your age, and your gender.
• With deferred annuities, you assign a fixed amount or monthly payments, and your account increases with deferred taxes until you start receiving payments later.

There are three basic types of rentals:

• Fixed annuity: The seller agrees to pay an agreed interest rate as his account grows and make regular payments with a certain amount. Note: Fixed annuity payments do not increase to keep up with inflation.
• Indexed annuity: The seller offers a return on investment based on changes made to a specific index, such as the S & P 500. Indexed rents also indicate that the contract value will not be lower than the specified minimum, regardless of the means of production of the index.
• Variable annuity: Choose how your account is invested through various options, usually mutual funds. The rate of return on deposits and the number of periodic payments you will receive will ultimately depend on the performance of the selected investment options. As a result, while variable annuities have longer-term growth potential than fixed rents, payment may decline in a weaker market.
• Some immediate statements attempt to track inflation by investing in securities, such as Treasury Securities for Protected Inflation (TIPS); however, the initial payments for these products are usually much lower, which can take several years to make the difference.
• Tax Consequences: One of the reasons many people buy annuities is that their account increases with deferred taxes, meaning that when you receive payments, your contributions are not taxed, but the profits they generate are taxed at your usual rate. Other deferred tax recovery accounts, such as the IRA plans and 401 (k), annuities have no annual contribution limit. However, as for other accounts, you will have to pay a federal fine of 10% for funds withdrawn from an annuity before 59 years and a half.

A significant tax disadvantage associated with annuities is that, unlike currency invested in equities, bonds or mutual funds, whose profits are taxed as capital gains (the current rate is 15%) when they are sold if they are held for more than one year, the annuities are taxed at the average rate of income tax, which can be considerably higher for people subject to higher tax levels.

Commissions and expenses

. The main disadvantage of annuities is that it can be costly compared to other types of investment. Among the cost factors to consider before signing any agreement:

• Committees. Many sales are sold by sellers who earn up to 10% commission for the initial investment, as well as ongoing commissions in the coming years.
• Annual fees. Depending on the type of income you purchase, additional account management fees may be charged at 2% or more per year.
• Delivery of goods. Most deferred annuities receive an early withdrawal penalty, called the "delivery cost." Refund charges usually start at 7 or 8% of your investment and fall to zero over the next 6 to 8 years. However, they can vary up to 16% and last up to 15 years. Please read your contract carefully.
• Some investment companies sell annuities in which no insurance agent operates, so there are no sales or redemption fees. Low-cost annuities include Charles Schwab, Fidelity, Vanguard, Ameritas Advisor Services, and TIAA-CREF. Some extra precautions:
• When asking for annual investment advice, it is advisable to consult a financial advisor with a single rate (rather than earn commissions on the products he or she recommends).
• Since the 401 (k) and IRA accounts have already deferred taxes and their rates are generally much lower, it may not be wise to reinvest these balances in an annuity. Ask your financial advisor to analyze the numbers.
• Before transferring an existing annuity into a new account, review the surrender charges, commissions, and other fees you will be charged (including a 10% penalty if you are under 59) to make sure that you deserve to do the rest.
• Many annuities lead to death. If you want your beneficiaries to continue to enjoy your benefits, look for rents, marriage, and survival (this will likely increase rates and decrease your interests).
• The payments can vary considerably; the comparison between different approved insurers is carried out.
• If the insurer who sells a pension has left the company, you may lose money. Therefore, check the insurer's credit rating.

For more information on annuities, visit the Securities and Exchange Commission and Financial Regulator investor websites.

Conclusion: For many, investing a portion of the money in annuities is a good way to diversify investments and provide a stable source of income for retirement. But make sure you understand the terms, the cost structure, and the possible penalties before signing the dotted line.