There is a very clear difference between annuities and mutual funds. Mutual fund is an investment option which is handled by an investment company. Mutual fund investments are hedged into various investment options which may include bonds, public stocks, and more.
Annuity is something which is provided by the insurance company wherein you pay a sum of money as the premium and at the end of the term you get paid a fixed amount of money. So the basic difference is that mutual funds are provided by the investment companies while annuity is provided by the insurance companies. Both them could be a viable investment options for future planning.
Comparison of Annuities With Mutual Funds
- Mutual funds are riskier than annuities :- Mutual fund is an investment option where your money is invested into various options such as stocks. Mutual funds are subject to market risks. Although smart investment in mutual funds mitigates the risk factors to a great extent, but there is always some element of risk involved. Regardless of the risks, mutual fund has become a very popular investment options these days. Annuity on the other hand is an insurance contract. There is a certain amount of money you pay to the insurance company and at the end of the term the company pays you a certain amount of money. There is hardly any risk involved in annuities as they are the part of the insurance contracts.
- What are the income options with mutual funds and annuities :-With mutual funds you can go for two types of income options at the end of the term. You can either ask for the lump-sum amount of money or you can create a systematic withdrawal plan where the money is paid out to you in parts over several months. A lot of retired people opt for the systematic income plan because it helps them manage their monthly expenses effectively. When you take a lump-sum amount you may get enticed to spend it all. Annuities also offer these two income options (lump sum and systematic) but there are other options as well. With annuities you can also opt for the lifetime income plan. There are two types of lifetime income plans – guaranteed and non-guaranteed. If you go for the guaranteed lifetime plan, you will keep getting a fixed amount of money for the entire life. Same is the case with non-guaranteed but the payment may stop depending upon certain variables.
- Taxes are deferred in mutual funds and annuities both :- You don’t need to pay the taxes on your investments with both these investment options till the time of the withdrawal. In fact, some mutual fund schemes offer you tax saving schemes. The amount of money you invest in these schemes is exempt from taxes. However, before buying the policy make sure you have read all the terms and conditions. By tax exempt, most of the investment companies mean tax deferred.At the time of withdrawal, the total amount is subject to the income taxes as per the law. If you have invested the money for retirement planning, make sure you withdraw it after the age of 60 so that you are charged less taxes.