Tag Archives: Variable Annuities

The Two Types of Annuities Simplified

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There are several investment strategies for ensuring that retirement is a time that is as free from stress and as financially stable as possible. One of the most popularly used of these strategies is investing in an annuity, which can guarantee a certain level of income for a designated period of time. There are a variety of different Types of Annuities, each with their own benefits and drawbacks. Choosing the right annuity can be a large investment of time and effort.
However, researching and ultimately choosing the best annuity for each individual’s unique financial situation can prove to be incredibly cost effective and lucrative.

Any annuity is a way in which an investor can plan for their retirement years, transforming part of their pension pot into a long term financial solution to be used during their retirement. However, choosing the right annuity can make all the difference when trying to plan for years spent in retirement.

Lifetime Annuities
A lifetime annuity is a way for those planning for retirement to use part of their pension pot to guarantee a certain level of income for the rest of their life. With this type of annuity, the investor is guaranteed a determined level of income for the remainder of their life, however long that may be. However, there is obviously no way to predict the lifetime of the investor. So there is no real way to know how long the payments will last. With this type of annuity, the payments stay constant, which means that they may actually end up losing value, depending upon inflation. There is no real way to increase income or payout with this form of an annuity. However, one positive aspect of this type of annuity is that the investor can always plan to have that designated amount of money, as it is guaranteed for the lifetime of the investor.

Variable Annuities
Variable annuities can sometimes be accompanied by great risk. However, they can also produce great reward. With this type of annuity, there is a much greater opportunity for asset growth, given that there are a range of investment choices available. The value of the investment differs depending on the investment options that are chosen. The investment options typically include mutual funds that invest in bonds, money market instruments, stock, or a combination of the three.

Those who choose this annuity strategy are those who are really looking to grow their asset and investment. However, for those who invest in variable annuities, it is crucial to keep in mind that that asset can be compromised. There is both opportunity for growth as well as opportunity for loss.

Create Your Own Bespoke Annuity

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An annuity is a way to turn pension savings into regular usable income for the rest of your life, or for a pre agreed period of time. Usually, an annuity is bought with a lump sum from the pension pot, and the size of the lump sum will determine how much income you could get back from the annuity. But annuity income also depends on a number of other factors including age, gender, location, health, the kind of annuity you choose, and of course current annuity rates.

Your pension provider is obligated to make an annuity offer to you; however, you have the right to explore the open market before making a choice. This is known as the open market option and your pension provider is required to make you aware of this path. Shopping around for an Annuity can help you understand the various types of annuities that are available from a multitude of annuity providers.

For instance, there are fixed annuities that pay a fixed income for the entire term of the annuity, and variable annuities such as escalating or investment linked annuities where the income you receive from the annuity varies over time due to several external factors. While a fixed, stable, guaranteed income may work for some people, others may like to have income that is linked to inflation or income that is linked to an external investment product.

An annuity once purchased cannot be changed or cancelled so it is vital to shop around and find an annuity that is the best match for your individual circumstances and needs. It is also important to be aware that many annuities have additional bells and whistles that can be added to the product. For instance, some annuities have the option of adding features whereby your income will continue to be paid to your partner or beneficiaries for a certain fixed period even after you are gone.

You could protect your income from being eroded by inflation by adding an escalating feature, where the annuity payments increase by a certain percentage each year or by investing in an inflation linked annuity, where the payments depend on the Retail Price Index. Naturally, adding extra bells and whistles such as these will generally impact payments in the initial stage – so that, for example, an escalating annuity will pay less than a conventional level annuity at the start of the annuity.

It is important to understand the details of how the annuity works before investing. The key to getting the perfect annuity is to use different tools and options to make the annuity work for you, and to strike the right balance between the level of income you need immediately, and the level of income you would ideally like to receive in the future.

Get the lowdown on the Two Types of Annuities

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An annuity is one of the most popular ways to optimise financial savings and use them to provide a regular income during retirement. Annuities are sold by insurance companies that offer this regular income in exchange for a lump sum – usually from the pension pot. There are many different types of annuities available on the market – but the two main types of annuities are fixed lifetime annuities (also known as level annuities), and variable annuities.

Fixed Annuities

Fixed lifetime annuities – fixed annuities are annuities where the income you receive remains fixed for the rest of your life – or until a predetermined period of time. You receive the income at fixed intervals, either monthly, quarterly, every six months, or yearly. The income you get from a fixed annuity depends on various factors such as the size of your pension pot, current annuity rates, your health and lifestyle, gender, and even your address. This is the most popular types of Annuities.

All these factors help the insurance company work out how much they can afford to pay you as a fixed regular income. You can also add extra features to a fixed annuity such as joint life option – where the income continues to be paid to the surviving partner, or early death guarantee, where the annuity payments continue for a fixed period even if you die during that period.

Fixed annuities can offer the security of a fixed regular income throughout your life. However, they do not offer protection against rising inflation or increasing spending, nor do they benefit from any upward movement in the financial markets in the future. There are different types of annuities that can offer a variable income during retirement.

Variable Annuities

There are different types of annuities that offer variable income during retirement. Variable annuities provide a change in income over the course of the annuity – and this may be due to different factors, depending on the type of variable annuity.

Inflation or RPI linked annuities are linked to the rates of inflation. High levels of inflation in the future will mean that you receive more income and thus have more spending power. On the other hand, fixed annuities offer a fixed income throughout the term of the annuity, so your income could lose its value over time if inflation continues to rise – which it always will.

Some other types of annuities that offer variable income include percentage increasing annuity – where the income increases at regular intervals at a fixed percentage, which is usually 3% or 5% per year. Both these as well as RPI linked annuities generally pay a lower income than fixed annuities in order to compensate for the future rises in income. You can also get annuities with an investment linked component. The investment component is linked to an external investment – so the income you receive will depend on the performance of that external investment and is not guaranteed.

Some other types of annuities include joint annuities where you can have your income paid to a partner after you are gone, and enhanced annuities, where the insurance company pays more based on a lower than average life expectancy. Enhanced annuities are available to those who meet certain health and lifestyle criteria such as regular smoking, health conditions like heart disease, obesity etc.

Fixed annuities have the advantage of providing a guaranteed, lifelong secured income. Variable annuities may offer a variable income which can help combat rising inflation, rising future expenses etc. However, variable annuities will generally pay less than its fixed counterpart in the initial stages. There are many different types of annuities available in the market and the key to finding an annuity or annuities that suit your needs is to shop around, understand each product and then make an informed choice.