Retirement annuities
Retirement annuities are a good, safe form of investment because nobody will ordinarily have access to the funds before the selected maturity date. Even in the event of insolvency, a retirement annuity is relatively safe. The maturity date may be set anywhere between the ages of 55 and 70. You can always leave the funds to continue growing until you are ready to start drawing from them.
Although there are many variations to choose from, there are two main types of retirement annuity. Conventional annuities
are managed by life assurance companies and other service providers, and living annuities
are managed by you. Living annuities are not a wise choice unless you are familiar with managing investments and have a lot of capital to ride out the market downturns.
You may want to invest your one-third cash payout. A voluntary purchase annuity
could be the answer. This is bought with a lump sum and is a good investment if you unexpectedly find yourself with money to spare - an inheritance, for example.
Conventional or fixed-interest annuity
With a conventional or fixed interest annuity
, you pay in your sum of money
and, in return, you are paid a fixed income every month
for the rest of your life
. The insurer takes responsibility for fluctuations in the market and the risk that you may live longer than the average person.
The advantage
of a conventional annuity is that your regular monthly income is guaranteed for life
. The disadvantages
are that you get the same income every month
or year, regardless of inflation and your investment dies with you
.
There are variations
to the conventional annuity which address its disadvantages, but often have drawbacks of their own. These variations are:
- The conventional escalating annuity, which provides a guaranteed income for life and a guaranteed annual increase at a specified rate - but initially pays out less than a fixed annuity.
- The conventional "with profits" annuity, which also guarantees income for life and offers protection against inflation.
- The joint life annuity, which ensures that after one spouse dies, the surviving one will continue to receive an income.
You can see that you need to look at all the options carefully before deciding what will suit your needs best.
Living annuity
With a living annuity, you - and not the insurer - take both the investment and the mortality risk. Briefly, the income depends on the growth of the sum of money invested. And that growth depends on the behaviour of the stock market - if it does well, your capital will increase; if it falls, your capital decreases. The question to ask yourself is, "Can I manage the investment and do I have enough capital to survive market setbacks?" The chances are your answer will be "no", unless you will have additional sources of income.
Composite annuity
Composite annuities
are a mixture of conventional and living annuities and to some extent offer the best of both worlds - flexible income from the living annuity part and a guaranteed income (security) from the conventional annuity part.
The advantages and disadvantages of all these alternatives need to be balanced against each other and weighed up carefully. Your own particular circumstances and needs must be taken into account.
Get advice from a professional adviser before choosing a product. You are making decisions that will have an impact on the rest of your life!