An annuity Based Pension might just be the answer.
Of all types of income generating investments, annuities are
some of the most controversial. There is a body of opinion that
says they are a complete waste of time and you would do much
better if you were to place the capital sum on the stockmarket
or invest in property. But then again the stock market has been
known to crash and property has frequently been known to
decrease in real value, so if security is high on your list of priorities maybe
annuities are worth a thought after all.
Annuities are popular as vehicles for pensions, perhaps mainly
because they can be very tax efficient. If money is wrapped up
in this investment it takes a tax holiday until such time as the
premiums become due and payments are made. As this is likely to
happen after retirement the tax liability falls dramatically.
There are two types of annuity. The former is deferred, which
means payments are made, usually on a monthly basis for a number
of years. This is a good way for the younger person to acquire
an income later in life. The other variety is the fixed version.
In this package, the purchaser pays a large capital sum usually
to an insurance company and payments begin soon afterwards.
The big enemy of annuities is inflation. At the outset the
agreed sum to be paid out might seem generous, but inflation can
erode the value of the venture in a very alarming fashion.
On the other hand a fixed payment annuity based pension provides
an excellent budgeting tool. You will know each month how much
money you will receive and thus in much the same way as a
salary, be able to cut your cloth accordingly. This allows for
more efficient financial planning.
When it come to tax, there can be penalties if the annuity is
cashed in before the "owner" reaches sixty years of age and this
could be a disincentive for those folks who plan early
retirement or find themselves made redundant before reaching the
official age of retirement. However, as I said before there are
some distinct tax advantages, particularly for those individuals
in the higher tax brackets. Deferred Annuities are in effect a
compulsory savings plan. In those years of high tax liability it
would make a lot of sense to save as much as possible because
these savings are then tax exempt. Tax is only due when income
is received from the plan. That means you start drawing your
annuity after you have stopped earning a high salary. It's very
neat because as you have decreased earning your tax liability
will drop to a lower level than previously. This all means you
have allowed the IRS to partly finance those golden days of
retirement. Now that begins to appeal does it not?
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