Once you have retired, the one thing that you will want is a guaranteed sum of money being paid out to you till your death. One of the biggest advantages of annuity is that it guarantees the payout for the rest of your life. The best part is that even if you have used up the contract value the payment will keep coming to you. This is the reason why a lot people are opting for annuity as the retirement payment option. Here are some advantages and disadvantages of annuities.
Advantage#1: You don’t get charged for taxes till the time of withdrawal
Another great advantage of annuity is that all the money that you invest in it is not applicable to taxes till the time you decide to withdraw it. You can invest as much money as you want in an annuity and you will not be charged taxes o them. This is not the case with the other retirement investment options. However, at the time of withdrawal you are charged for taxes. So do remember that it is not completely tax free.
Advantage#2: You can always reinvest in annuity
For those who invested in annuity get a fixed monthly payout either till lifetime or till the end of the contract. It all depends upon the type of the plan chosen. In first case you keep getting monthly amount till the time of your death. In the second case you get the monthly payout for certain number of years depending upon the contract and then at the end of the contract you are paid out a lump-sum amount of money. The good thing is that if you want to keep getting the monthly payment, you can keep reinvesting the lump sum amount in annuity at the end of the each term.
Advantage#3: You decide how much you get paid
You can always have a control over the amount of money you get paid every month. There are two factors that determine your monthly payout. The first one is the amount of money you invested in the annuity plan. The more you invest the bigger is the monthly payout. The second factor that determines the payout is how much you chose to be paid out. If you choose to payout higher for a certain amount of invested money, your monthly payments will be higher but your term will end earlier.
Disadvantage#1: Lifetime income not guaranteed
Although it is advertized as lifetime payment but you may not always get paid out for the rest of your life. There are many things which decide the amount of payment and the duration of payment. The problem with annuity is that a lot of its benefits get converted into drawbacks after a certain period of time.
Disadvantage#2: It is very costly
What offers you bigger benefits also comes for a bigger price. Annuity investment is perhaps one of the costliest investment options these days. People are still going for annuity because of its apparent advantages. It is also a little difficult to understand the annuity policy. However, if you are able to understand it you will be able to optimize the benefits.