Retirement annuities seem to have a bad reputation. However, when you've subscribed to all possible tax advantaged contribution plans and you still need to save towards a retirement account, a retirement annuity can be a serious option.
This type of investment allows your money to grow in a tax-deferred way. That growth is taxed at ordinary income tax rates on withdrawal. You can 'buy' the annuity with a lump sum or you can invest an amount on a regular basis.
If you chose a fixed-rate annuity the insurance company handles the investment of the money and pays you a pre-determined fixed return.
The other option is a variable annuity and you decide on the investment spread – from conservative to risky – of your funds. A variable annuity is therefore actively managed on your behalf and its annual expenses could be higher.
At retirement you have some options:
You can withdraw the entire amount. This seems to be a very popular option. I have done so myself. I thought I could invest it better that the insurance company! In retrospect I'm not sure that I did better.
You can opt for regular and guaranteed payments for a fixed period of time or until your death. This provides you with a steady source of income. At death the balance goes to your beneficiaries.
Commission and Fees
Retirement annuities seem to have a bad reputation because it is sold to you by an insurance broker who gets a commission on the sale. Well, when you buy life insurance the insurance broker also gets a commission. I fail to see why the commission is acceptable for life insurance but not when buying annuities.
There's also the argument that management fees on retirement annuities are expensive and that the growth is mediocre.
Years ago the company that I worked for was taken over by a larger group of companies. During the roll over of the old pension plan into the new group's plan a portion of the accrued pension of the old plan - by law – had to be put into a retirement annuity. The amount was trivial and I totally forgot about it.
At age 65 the insurance company contacted me to start drawing against this annuity. I was astounded at the capital that trivial amount grew into. And watching the growth on a balanced investment spread I don't think a professional portfolio manager could do better on such a relatively small amount.
On this Web site we recommend that you appoint a qualified and experienced advisor to assist you with your retirement plan. Your advisor would be able to propose the best annuity for you and your circumstances.
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