Annuities Highlights
By Joel Zimmerman

6 Frequently Asked Questions on Annuities

Annuities are gradually becoming a part of retirement portfolio for many people. They are not as popular as life insurance policies and some other retirement options, but are definitely gaining momentum. If you are considering buying an annuity but are a little lost on how to move ahead, here are some frequently asked questions on annuities that might also be questions you might have. Check out the answers, and at the end, you will have a better idea about annuities, enabling you to take informed decisions.

1> What Is An Annuity?

An annuity is a contract between you and an insurance company where you make a series of payments or a lump sum payment that will ultimately yield a steady retirement income once you retire. An annuity can be said to be a regular income that you get with your pension fund at retirement. After it is set up, the annuity is normally fixed and it cannot be changed. This is why you need to consider all the options carefully before setting up the annuity.

2> When Should I Buy An Annuity?

Consultants say that the best age to buy an annuity is 59½ years and above. It does sound late but the later you buy the annuity, the insurance seller will expect to have a shorter period of time to pay you. This makes the payments higher as compared to those payments you would get if you bought it at a younger age. The older you are when you buy the annuity, the better it is.

3> What is Tax Sheltered Annuity?

This type of annuity allows employees to make contributions from their income into a retirement plan. All these contributions are deducted from their income, due to which the contributions and the related benefits will not be taxed until the employee withdraws the contributions from the plan. The employee will also gain the benefit of having additional tax-free funds accruing as they can also make direct contributions to the plan.

4> How Are Annuities Taxed?

Any registered annuity that is funded with money from registered retirement income fund or a registered retirement savings plan will generate payments. These payments are fully taxable as regular income. All the payments in a prescribed annuity are considered as a combination of the capital being paid back and the interest generated. The tax is paid on this interest. The way annuities are taxed will also depend on your age when you purchased it. The taxes might amount to zero on the payments from prescribed annuities that are bought at age 65 or 70. However, one has to remember that the percentage or amount taxes may change every financial year or every few years. So when you buy a plan, remember to check these details carefully.

5> Why Do Annuity Rates Vary Between Insurers?

Insurers use different factors to set returns on annuities. These include — client’s age, gender, insurance company’s financial position, amount of money the client is putting in etc. where company’s financial position plays the most significant role in determining the interest rates. Depending on the market, the insurers may decide to be aggressive on the annuities or choose not to be too aggressive. Companies may change the pricing over a short period of time due to its changing needs.

6> Why Is An Annuity Appropriate For Funding Your Retirement?

If you have not considered annuity for funding your retirement, then maybe it is time you did. As a standalone option or as a part of your overall retirement portfolio, an annuity will be advantageous because of numerous reasons that include some of the following:

  • There will be a guaranteed interest rate
  • A good back-up plan if you have maxed-out your 401(k) contributions
  • Provides a steady stream of income after

It is crucial that you consult with your insurers for further queries. It is better to ask them now instead of regretting later, so just ask every question you have in mind — no matter how insignificant or silly they might seem to you.

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