I’m not really one to dwell on things like life insurance and pension funds, it just feels a bit negative and depressing to me. A few years ago, I wouldn’t have given it any thought at all, but after having children I’ve developed a little bit of a responsible streak (sort of).
These days I do consider the need for life insurance, just so that I know my family will be secure if the worst was to happen. I even think about what I’m going to do when I’m old and wrinkly and my children have left home (they are scary thoughts).
Something I wrote about no too long ago were government bonds and when they could, or should be used. While a little boring, they actually offer a very safe a reliable way to invest and receive a guaranteed return over the mid to long term. That got me thinking a little more about other ways to guarantee an income over longer periods, which led me to annuities.
What are annuities?
Annuities are about as sexy as wearing socks to bed (apologies if you somehow find this attractive), but they do offer plenty of security if that is that you are looking for. The best way to think about this ‘investment strategy’ is to consider it along the same lines as a pension.
Annuities are generally less about investment and more about using existing funds you have in the form of your retirement fund to provide you with a steady income over a period of time (anywhere from a year or more).
How annuities work
Essentially you pay a lump-sum amount to a company, who offer a guaranteed interest rate over a fixed period, or even for the rest of your life. The interest rate is genrally lower than many other investment pathways, but it remains fixed no matter what the market is doing, which means you know exactly where you stand at all times.
Most annuity providers will also let you:
- Choose the amount you want to be paid
- Choose the frequency (monthly, quarterly, yearly)
- Increase your payments in line with inflation, or by a fixed amount each year
- Have payments continue to family on your death (if funds still remain at that time)
Aside from the reassurance annuities offer, there are also potential tax benefits to be had. Moving your retirement funds into an annuity instead of taking it all as a lump sum can help avoid payment of income tax if you meet certain age requirements. This is a nice way to preserve funds and could be worth a few percentage points in overall returns.
I’m not totally sold on annuities, but I have a bit of time up my sleeve before I have to start making these kinds of decisions. It certainly helps to be aware of the various options available anyway and who knows, maybe annuities could be a part of a wider range of income streams for me and my family in the (not so near) future.
Do you ever think about the different retirement options available to you?
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