Annuities are commonly used as part of the retirement planning process although many focus on saving for the future with deferred products. An immediate annuity may be an alternative worth considering for those that want a guaranteed income and/or need to boost their retirement savings close to the time they give up work. What are immediate annuities, how do they work and what are the pros and cons?
What is an Immediate Annuity?
An immediate annuity is a type of insurance. It is usually purchased with a lump sum payment with the aim of providing an income in retirement. As its name suggests, this kind of product starts to give benefits in the short-term unlike deferred annuities which are purchased further in advance and which may provide a different type of income.
How do Immediate Annuities Work?
Those buying an immediate annuity will hand over a sum of cash with the aim of being given a guaranteed income in return by the insurance company. This income may be fixed (payments will always stay the same) or variable (payments may increase or decrease according to investment returns). In many cases the income given will last for life.
What are the Advantages of Immediate Income Annuities?
This kind of product may suit some approaching retirement age for a variety of reasons. For example, an immediate annuity may give:
- A guaranteed income for life no matter how long the individual lives.
- A chance to immediately boost retirement income if savings have not gone according to plan.
- Some tax breaks if the purchase is made with tax-deferred cash.
- The chance to build in flexibility such as variable payments, survivor benefits, set terms and inflation changes.
Before choosing an immediate annuity, however, it is also a good idea to consider any potential drawbacks.
The Disadvantages of an Immediate Payment Annuity
A standard immediate annuity also comes with some negatives. For example, this kind of product may:
- See an individual tie up their cash for life.
- Not give any benefits/return of income upon death.
- Decrease in value over time depending on inflation rates.
The flexibility offered by some immediate annuities may counteract these negatives but may also bring their own downside. Changing annuity terms to make them more favorable may see an increase in cost/and or a decrease in payment rates.
How to Choose the Best Immediate Annuities
Those considering buying an immediate annuity should take time to compare rates to make sure they get the best deal and the best terms. There are plenty of online comparison sites and annuity calculators to help with this.
It may also be worth looking at how annuities work, the general pros and cons of annuity investment and the role these products can play in asset allocation and retirement planning before coming to a final decision on how/where to invest.
Sources: Bankrate.com
Carol Finch - Carol Finch is the Topic Editor for Retirement Planning, Budgeting, E-Commerce & Technical/Business Writing on Suite101.
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