Investment via Annuities
Of all the forms of income generating investments, annuities are
some of the most controversial ones. Annuity - derived from the
Latin word 'annus' - is basically an insurance product sold by
insurance companies through authorised agents. This type of
investment facilitates a series of payments in the
future, in a defined manner, in exchange for an up-front payment
of money.
There is a group of individuals who think that annuities are a
waste of time and there are much better tools of investment such
as stock market or property. But then again both the above forms
of investment are vulnerable to crash and do not score very high
in comparison to annuities, with respect to safety.
Annuities are commonly of two types first Deferred and the other
Fixed. In the case of 'Deferred Annuity', the payments are made
usually on a monthly basis for a number of years. This form of
annuity makes sure that a younger person acquires a good income
in his later years. In the latter form that is 'Fixed or
Immediate Annuity', the purchaser pays a large capital sum
usually to an insurance company and payments begin soon
thereafter.
One of the biggest hurdles faced by annuities today is
inflation. At the outset the agreed sum to be paid out by the
insurance company might look excellent and very heart
warming, but inflation can erode the value of your investment at
an alarming rate.
Another draw back with annuities is that instead of being a
long-term capital gain the earnings on annuities are taxable
just as income is. Plus there are certain stringent rules and
regulations governing the deposit that may not be customer
friendly. One of which is that the customer cannot withdraw the
money until he turns 59.5 years or else he would be charged a
10% penalty for withdrawing the same prematurely.
So why should you consider Annuities as a mode of investment?
Frankly any individual planning to invest in annuities should be
the one who is not already contributing his maximum to other
forms of retirement schemes. However, annuities are an excellent
mode of investment for individuals in higher tax brackets. In
those years of high tax liabilities, annuities make a lot of
sense, as these savings are tax exempt. Tax is only due when
income is received for the plan. That means you start drawing
your annuity after you have stopped earning a high salary.