In the UK, a large number of people are still not aware of what annuity is and how it works and these are the people who are missing out a lot on the best annuity rates. The result is therefore a loss of essential potential retirement income. Reports have revealed that around 150,000 people miss out on higher annuity incomes every year. But, what is an annuity and how can it help people financially post retirement? Let us find out.
An annuity is a contract that is made between an insurance company and an individual. Under this contract the individual will be provided a regular income in exchange of investments made over a period of time or payment of a lump-sum amount. Annuity is the best option for a person who is looking to invest their money to make their retirement secure and safe. There are many different types of annuity products available on the market today. Let us check out some of the major types of annuities and how they can help safeguard your future.
What is an annuity?
Most of the insurance companies which provide annuity define it as an investment that guarantees payments of specific amount made over specific time intervals. The amount that the insurance company receives from an individual can either be a lump-sum amount or a periodic interest.
Generally, there are two main types of annuities. These are fixed and variable annuities.
Fixed annuities – insurance product that is designed to provide tax deferred and long term savings. There may be few investment options, but fixed annuities provide a guaranteed minimum rate of return. No tax deduction is done on the money that is deposited. However, when you start making withdrawals, you will be required to pay taxes. There are no income limits or annual contribution limits. This is a good option for those looking to increase their tax deferred savings.
There are different rules, expenses and restrictions that apply to fixed annuity contracts. These usually vary based on the product you have chosen and the insurance company you have signed up with.
Variable annuities – an insurance product in which the insurance company guarantees to pay a minimum payment after the end of the accumulation stage. The premium may be split into separate sub-accounts and used to invest into market segments such as the money market, bonds, international equities and mutual funds. There are risks associated with investing funds because you can either earn more than you have invested or lose more.
There is also another type of annuity that is known as indexed annuity. This type falls in between fixed and variable annuity.
Indexed Annuity – is a fixed annuity which earns interest that is linked to an external equity reference. The interest rate that is paid is according to the performance of a well known index such as the SP500. The annuity growth depends on the participation rate of the index it is tied to. Under this annuity, you do not lose your principal. You are guaranteed a fixed annuity and at the same time, there is potential for earning a profit such as in a variable annuity.
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