What is an annuity?
An annuity is a long term financial contract sold by an insurance company which promises to provide a specified series of payments to an individual for a fixed period, often for the lifetime of the recipient, in return for a stipulated lump sum premium or a series of premiums. An annuity is tax-deferred and can be used for accumulating money for retirement or other long term future needs.
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Deferred Annuity
A deferred annuity is a long-term income accumulation product. This type of annuity has two phases. During the saving phase, the money you put into the annuity earns interest. The earnings are tax-deferred as long as you leave them in the annuity. During the payout phase, the company pays taxable income to the annuitant. Deferred annuities can either be fixed or variable.
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A deferred fixed annuity is a long-term income accumulation product. With a deferred fixed annuity, you are guaranteed to receive no less than a minimum rate of interest.
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A deferred variable annuity is also a long-term income accumulation product. With a deferred variable annuity, the rate of return during accumulation is tied to market performance of specific subaccounts. Future income payments can be fixed or variable and are based on the contract value at the time of annuitization.
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An immediate annuity is designed to provide payments within a year of issuing the contract.
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What is annuitization?
Annuitization is the payout period, where the designated person, or annuitant, receives the money from the annuity. If you choose to annuitize before the specified contract period is completed, the money you withdraw may be subject to early withdrawal penalties and other charges.
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Tax deferral means that taxes on the earnings of a financial product are postponed until you withdraw the earnings.
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When considering whether to choose a fixed versus a variable annuity, there are two important questions to ask: what are my long-term financial goals and can I afford risk?
A variable annuity has the potential for faster growth, however, that growth is not guaranteed since the product is tied to the market and there is a risk of loss. Therefore, a younger individual with disposable income and many years left in the work force might want to consider a variable annuity if that individual is financially able to withstand downward market fluctuations and wait for the potential upswing.
However, a person who cannot afford financial risk, or does not have many years left in the work force, or none at all, might value safety of principal and tolerate the slower earnings increase versus a potential higher increase with a risk factor. Even in a downward market spiral, a fixed annuity comes with the guarantee of a certain percentage of interest earnings depending on the annuity you choose.
Those desiring safety of principal who also want to explore the upward potential of the market may want to consider a fixed index annuity. These annuities offer the safety of principal guarantee but with the growth potential of annuities that are tied to a market index.
Choosing an annuity is an important decision and it is a good suggestion to work with a financial or insurance professional to help determine which product is best for you.
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A person who is looking for a competitive first year interest rate and the flexibility to invest more money over time may want to consider a flexible premium deferred annuity.
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Key features of a multiple year guarantee annuity are the security of guarantees and the flexibility to select from a range of interest rate guarantee periods so that a plan can be structured to fit individual preferences.
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An individual looking to save "serious money" for retirement or other future financial needs should consider a single premium deferred annuity. This type of annuity is a long-term, tax-deferred plan. You contribute a lump sum initial premium, usually no less than $5,000, and your interest earnings accumulate tax-free until you withdraw the money.
Standard Life and its representatives do not give legal, tax or accounting advice. If you need such advice, consult your attorney, accountant or personal tax advisor.
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