A common investment choice for people looking to retire is to invest in fixed-term annuities. Fixed-term annuities provide a guaranteed income over a set period of time, which is exactly what most retirees are looking for in an investment. Generally speaking it is a lot more tax effective to have your retirement savings tied up into an annuity than to keep the cash in a bank provided you are at or close to the retirement age.
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What are Annuities?
An annuity is a financial product that is designed to ensure a steady cash flow. It is a common investment choice for people wanting to retire without having to actively manage their finances. Note: There is a great video that explains the finer points of annuities here.
What is the benefit of Annuities?
- The most obvious benefit is that you get guaranteed income over a fixed period of time
- You get to choose the amount of your payments
- The income you receive is stable regardless of market conditions
- You can choose how often you relieve payments
- If you die many annuities can be paid to someone who you elect to receive them
Economic Conditions, Annuities And Your Retirement
As most of you will be aware the world economy isn’t quite as healthy as it once was and this has flow on effects for people planning on retiring in the near future. Not only are their retirement accounts now looking a lot lower than before the GFC, but annuity rates in some of the worlds major economies are also at record low levels.
Scott Mullen at UK annuity website mypensionexpert said: “Annuities rates have fallen in the UK and the US in recent years due to the current economic climate. The banking crisis has led to record low interest rate on both sides of the Atlantic which is having a knock on effect on current annuity rates. This is because annuity providers use secure types of financial products such as corporate bonds and government bonds to provide the income for their annuity book as these types of investment are usually safe and low risk.
When government and corporate bonds are introduced to the market they have to offer a competitive rate of interest to attract investment, but due to the lack of an attractive alternative form bank interest rates the yield offered have fallen proportionately. The economic crisis is having a harder impact on UK rates as the annuity rate offered for a 65 year old male is 5.75% compared to 6.8% in the US. This could be as a result of UK qualitative easing which is putting additional downward pressure on UK government bond yields.”
What does this mean for retirees
Essentially the lower the annuity rates go, the less money that will be paid out for investors and retirees. This means that they may not have as much money as they originally planned to when retiring.
Are Annuities Still Good for Retirement?
People need to work out exactly what they want to get out of retirement and how actively they want to maintain and control their funds. If you feel that you would prefer not to have to manage your money when you retire, then you just need to make sure that the fixed-term annuity is going to provide you with enough income to ensure you have a comfortable retirement.
If you like to be a little more active with managing your money, then perhaps an annuity may not be the best option for you. Or perhaps you might choose to only invest a smaller portion of your money into an annuity and look for bigger returns elsewhere.
These types of decisions should be carefully thought out as they can drastically change the retirement you have. If you aren’t sure what you are doing then you should really consult with a professional.
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