6 Advantages of Annuities

By Compuquotes Team on March 27th, 2008

Aside from the basic features of an annuity, it has inherent advantages or pros to begin with. If you are a prospective investor looking at financial vehicles, there at least 6 basic pros you need to know about annuity.

  • 1. Guaranteed income for life

Should you receive a windfall in terms of early retirement benefits or an inheritance, you might be thinking of investing the money on an annuity because you would want that your future is provided for. With your lump sum or considerable sum to make as down payment on an annuity, you can specify future periodic payment amounts you desire, based on the amount of money you are investing now, or are planning to invest over a limited period. While other pension plans or social security benefits may provide you with some kind of monthly or regular income in the future, these are limited amounts and may not be commensurate to your future needs. With an annuity, you project how much you will need in the future and stipulate that out of the investment you make today, you would want it allotted to support you from retirement to death.

  • 2. Your wealth's protection against inflation

Say you did not opt for an annuity but instead placed the money in high yield deposits with a local bank. There is no guarantee that the high yields will be commensurate to inflation changes. A sudden fluctuation or deterioration will considerably diminish the purchasing power of your money. While allowing for inflation protection in an annuity may somehow cost you, at least you are protected of the uncertainty in inflation movements.

  • 3. Principal protection

The principal amount of your money or investment will also be protected. You can ask for a stipulation in the annuity terms that the value of the annuity be pegged at a guaranteed amount that is more than the amount of your investment. This is made possible by investing the money in sure-fire investments that will bring in substantial returns.

  • 4. Tax efficiency

In an annuity, you can have the accommodation that at least your earnings will not be taxed until such time you begin withdrawing or are being paid out of your funds. Deferring the collection or withholding of tax for later definitely impacts on the earning potential. The principal is not reduced unnecessarily and the resulting returns or interests on it will surely be higher.

  • 5. Relative flexibility and accessibility

If you have separate funds or savings to allow for emergency, or if presently you already have other investments aside from this annuity that you wish to put some money on, then you enjoy relative access and flexibility. You don't need access now to your annuity so it will be alright to have the payout deferred for a future date you desire. And you can be flexible enough on the terms of payout. You are not hampered to do other investments should the opportunity arise.

  • 6. Better returns at limited risks

At fixed rates hinged on pre-agreed time and manner of payment, your annuity issuer can offer relatively better returns for your money. You can stipulate to have the money invested in sure investments at limited or zero risk.

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