Annuity
Should I buy an annuity? It is an often-asked question when it comes to planning for retirement. On one hand, investing in a pension scheme (or other vehicle) to buy an annuity before the age of 75 will give a guaranteed income good for the remainder of your living days. It is seen as a responsible investment to make and will ensure that you live comfortably in the years after retirement. On the other hand however, annuity rates are so fickle that by the time it comes to buying an annuity, the annuity rates may be so low that return on investment is poor. In such circumstances, thoughts about that alternative investment vehicle that could have performed much better than an annuity scheme begin to surface, leaving us to question again whether we should buy into an annuity.
For most who have objections about annuity schemes it is the fact that by the age of 75 they must spend 75% of their pension fund on buying an annuity. Furthermore, should they depart this earth without enjoying the fruits of their annuity purchase, whatever funds remain unused are taken by the insurance company, leaving relatives and dependants without a penny. All this is set to change in 2006, when an alternative to the annuity scheme - ASIs - is to be launched by the government. But, even with ASIs in place the question of whether to buy into an annuity scheme still remains.
Factors to consider when buying into an annuity scheme
So, what factors should investors consider before opting to buy an annuity?
1) A standard annuity scheme will allow you to receive 25% of your pension fund as a tax-free lump sum. This is great for those people who want to realise some immediate benefit of their pension fund. It is important to shop around though for the best annuity provider, as some providers will place stipulations on how that 25% is used.
2) There are different types of annuity products for consumers to choose from. The most popular type is the standard fixed annuity, that offers immediate payout together with fixed payouts for the rest of your life. This type of annuity accounts for some 80% of annuities purchased. Making up the remaining 20% of annuities are variable annuities either with fixed or variable investments. Which one you choose is dependent upon your personal circumstances.
3) For a married person, spouse benefit is available to annuity policyholders. This allows payment of annuity funds to the policyholder's spouse in the event of the policyholder's death. Be aware though that the period spouse benefit is paid out for generally runs from the date at which the policy is taken out. So, should you take out a 10-year spouse benefit and die nine years later, your spouse will only receive benefit for one year. Additionally, spouse benefit reduces the amount of regular income you receive from your annuity. For married couples, it may be more beneficial to opt for a joint-life annuity policy instead.