What is Annuity?
Typically annuity is a fixed amount of money that a person receives each year and for the rest of his/her life. But mostly this fixed amount is paid monthly in installments so that the person can make the financial decisions and plans easily.
It is just like the amount you receive after the retirement from your government job each month. But annuity is a contract that you can make with any private company, a life insurance company or any other party. You have to decide how much you want to save for your retirement.
You can either pay a lump sum amount or you can pay installments and payouts start after a fixed time when you start taking out that money. There are different types of annuity and in some types, depending on your contract you can take out the lump sum amount of your annuity.
Advantages of Annuity
Guaranteed Payout: In an annuity contract, the annuitant (The person who is supposed to receive the payments) has a guarantee to receive the payment throughout his or her life. The annuitant will keep receiving payments till he or she dies even if he or she has received all the payment written in the contract.
Tax Deferral: This is the only type of investment that you can defer tax. It means that you have to pay out the tax on this amount, but while you are investing, you don’t have to pay any tax. You have to pay the tax amount at the time when you are going to take out the money.
Take Out a Lump Sum amount: In an annuity, you can decide if you want to take out your payments, monthly, quarterly, bi-annually or annually. Even you have the option to take out a lump sum amount that you can invest in your business as well after your retirement.
Sell your Annuity: You can even sell annuity for some cash. It means that while you are taking the monthly payments but you feel that you need more cash then you can sell your annuity payments and get a lump sum cash at any point. If you sell a portion of your annuity, you will receive the cash for that time period and after that time, you can resume receiving annuity payments.
Disadvantages of Annuity
Illiquidity: In some annuity contracts if you start taking out payments before a specific time or specific age, you get penalties and you have to pay some amount against the payment you receive.
High Fees and Costs: This is the most expensive investment as there are so many fees associated with the annuity investment. Initial commission, early withdrawal fees, and ongoing investment management fee is associated with it. So, make it sure that you are aware of all the costs and fees of your annuity contract.