An annuity is an investment account that consists of two phases: an accumulation phase and an ‘annuitization’ (pay out) phase. It is fully guaranteed by the issuing fraternal benefit society’s or insurance company’s general account assets. Monies are accumulated at a favorable interest rate and, at a time or times specified by the investor, are then paid out (‘annuitized’) to him or to a different annuitant. Here are some reasons why annuities are a preferred vehicle for long-term, interest-based investments.
The Providence Association’s so-called flexible premium deferred annuity currently pays an interest rate of 3.25%. Although it can vary over the course of years, this rate of return will most likely always compare favorably with bank CDs. And Providence guarantees a minimum interest rate of 3%, regardless of what CD rates might do in the future.
Moreover, Providence’s annuities are completely tax-deferred ‘ i.e. the investor pays no income taxes on interest, until withdrawals are made, regardless of how many years go by from the time of an initial deposit. This raises an annuity’s effective growth rate of interest to 5.30% (depending upon your tax bracket), levels that CDs cannot approach. The tax savings are further compounded in instances where the accumulation of wealth occurs while the investor is in a higher tax bracket and makes withdrawals in later years, after he has reached a far lower tax bracket.
Unlike CD’s Providence annuities allow for initial investments of only $300 and future deposits at the investor’s discretion and timing (there is a $50 minimum on future deposits). There are no renewal date concerns or worries. One can set a deposit schedule during an annuity’s accumulation phase, kt need not honor it. Deposits are completely flexible.
Because annuities are longer term savings and retirement vehicles, there is a penalty for withdrawals before the age of 59.5 and an annually decreasing surrender charge on withdrawals of over 10% annually, during the first six years. However, the fact that annuities are designed for accumulation of longer term investments makes these ‘limitations’ irrelevant.
Annuities are a great place ‘to park’ larger sums of money that investors might receive from inheritances, insurance policy or other endowments or retirement buyouts.
At the appropriate time, the insurer can design a suitable monthly payment schedule to the investor, during a carefully calculated guaranteed payout period. This relieves the investor of worries about monthly budgeting. Or, the investor can make his own withdrawal plan or schedule at the appropriate time ‘ after turning 59.5 and after the annuity is in place for six years.
Another great use for annuities is as a retirement savings vehicle. The younger investor can regularly make deposits and watch his accumulations grow tax free.
Withdrawals can then be made on a pre-determined schedule or at the investor’s discretion. Annuities are also a superior means for giving employees deferred income benefits.
Should the investor die, his monies will go to a designated beneficiary. Should he become disabled, surrender charges and penalties are waived on the accumulations.