Annuity Blog

Is an Annuity a Good Investment?

Posted by: Anne Morrison | Feb 28, 2015

Retirement income comes from different sources, one of which is an annuity. The question is, is it worth investing money in this financial product or is it something that you can do without? To find out, you need to know what an annuity is and how it works.

discussing annuities with friends

Photo by Sam Howzit

It is not an investment, per se.

Though some annuities offer investment options in the policy, they are still insurance products. Therefore, you shouldn’t buy an annuity simply because of the good investment returns it may provide.  Primarily, you should get it because of what it says it will do in the contract—which is to generally provide you with a steady source of income in retirement.

When you have that mindset, you will see annuities for what they really are and decide if it’s a good buy for you or not.

Your Retirement Needs and Financial Goals

Annuities are designed to serve a very good purpose, but this is not enough reason for you to go ahead and buy one for yourself right away.

Before you buy, you need to determine if it suits your needs, help achieve your retirement goal, strengthen your retirement nest-egg, and protect you from income loss later on in life.  If so, purchasing it would be a smart thing to do. Otherwise, you may want to review your plan and other retirement income options.

What You Need to Know Before Buying an Annuity

Before you purchase an annuity, here are important things you need to know:

Type of Annuity

Annuities are generally designed to provide payouts for future use, but it comes in different types and each one of them is tailored to match a specific purpose or preference.

There are several kinds of annuities available in the market today, but they are usually under two main categories and these are immediate and deferred.

Immediate annuities can be bought with a lump-sum amount, and you can receive payouts right after purchasing. Payments can last for a specific term or for the rest of your lifetime. Meanwhile, deferred annuities will start making payouts at a particular date in the future. Prior to that date, you can continually put in money in the account and make it grow tax deferred.

Determining the right type of annuity to buy will be highly dependent on your needs and financial strength.

Reason for Buying

Are you buying an annuity because it’s the first option you’ve come across with? If so, we suggest that you explore all the other options first before making a decision.

On the other hand, purchase an annuity if you have carefully assessed your retirement plan and deem that it fits into your preferences and goals.

Impact on Taxes

Different types of annuities don’t just vary by their features, but also with the way they are taxed. When purchasing annuities, you need to factor in how your income will be taxed.

Payouts from an immediate annuity are not taxed entirely, because part of what you receive is considered a portion of your principal amount. Meanwhile, payments from deferred annuities are taxed the same way as your ordinary income.

Fees and Costs

When you purchase an annuity, you may need to settle fees along the way, especially if you decide to withdraw ahead of time. Annuity owners are commonly charged for commissions, monthly fees, annual contract fees, management fees, and surrender charges.

Never go ahead with an annuity without confirming you understand all of the small print. Also, be wary of agents who push you into getting an annuity that you don’t like – some annuities give them better commissions than others and they may not be looking after your best interests.

Careful Consideration

An annuity is a great way to ensure income in retirement, but as with all financial products, this should not be bought in haste. You need to do your homework, carefully assess your needs and investigate if annuities will give you the best value for your money.