Variable annuities
Annuities are a group of investment products available through life companies. They offer the ability for an investor to buy into an investment vehicle that pays out an income to the policyholder during their retirement years. Annuities can be purchased with a lump sum, such as a pension fund or liquidation of other assets, or by making regular payment contributions over a longer period of time.
Either way, investors who are interested in taking out annuities as a way to provide them with an income later in life must choose between fixed annuities and variable annuities. Fixed annuities guarantee the annuitant a fixed rate of interest on their investment for a mutually agreeable period of time. Variable annuities on the other hand have no such guarantee, the rates varying up or down in response to market forces.
Fixed annuities are generally the most popular annuities product amongst those who are financially cautious. The life company invests the annuities payments in this instance into low-risk safe funds that are obligated to return a certain level of interest. On the whole, the interest returned is low and so fixed annuities do not have the potential to make high gains. This type of annuities product though does mean that investors are pretty well guaranteed a certain level of income during retirement.
Variable annuities are more suitable for people who are willing to take a bit of a risk with their annuities fund. On variable annuity products life companies invest an annuitant's payments into a wider spread of investment funds, from low-risk funds to high-risk funds. Overall, investment returns on variable annuity products have the potential to be much higher. However, should the investment funds perform badly, then the return may not be very high, so creating uncertainty in the amount of income available to the annuitant during retirement.
More choices on variable annuity products
For those that do select to take a risk on a variable annuity product, there are more choices to be made about how to receive the income generated by the variable annuity. Here is a run-down of the options available to variable annuity holders: -
Level annuities: Level annuities provide a monthly income for the remainder of the policyholder's life. Payments though are not guaranteed, they will change in line with the performance of the variable annuity product purchased.
Temporary annuities: This type of annuity product pays out a fixed income for a specific period of time, although the rate of income is ultimately reliant on the performance of the variable rates associated with the variable annuity product.
Immediate annuities: If you want payment to commence immediately after taking out your variable annuity product then an immediate annuity will enable you to do this.
Escalating annuities: Escalating variable annuities provide the ability to weight your annuity income so pay outs are higher in your latter years of retirement.
Deferred annuities: This type of variable annuities product requires pay out to commence at a specified future date.