Annuity Pros And Cons
Annuity is undeniably an essential aspect of any retirement plan. It requires the person to invest a pre-determined amount of funds with the insurance company to receive monthly returns on it for the remaining years of his post-retirement life. |
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Although it is amongst the best financial tools to safeguard your future, it has its own advantages and disadvantages. Therefore, before you choose an annuity plan as a retirement tool, make sure you are aware of the various cons associated with it.
Following are the main annuity pros and cons to be considered before making any investment:
Pros: If you are not willing to undertake the risk of losing a significant part of your savings, you can comfortably rely upon the steady and dependable option of annuity. Periodic payments for your entire life can be guaranteed by entering into its immediate lifetime contract. Moreover, this tool is a good alternate to the conventional pension plans sponsored by the employers and can ensure a steady income in your old age. Another main advantage of an annuity is that it makes your investments grow free of tax. Besides, no restrictions as such are imposed on the eligibility of a person to make investments. As an annuity is guaranteed by state funds, you need not worry about your investments being lost in any circumstance. In case of inflation, you may even customize your annuity contract to suit your budget. Last, but not the least, the total annuity value is always equal to or more than the total amount invested initially.
Cons: Nonetheless, an annuity contract traps a large amount of fund for a long time. It is therefore thought to be relatively less flexible in nature. Also, while it yields guaranteed returns each month over a stipulated period of time, it cannot help you during an emergency requirement of a huge amount of funds. It also does not have any provision for making sudden gains, as in the case of stock market investments. Although annuity investments eventually become tax-free, a heavy penalty of nearly 10 percent is levied in case of early withdrawals. In addition, extra fees, like the surrender and sales charges, need to be paid when entering into the contract.
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