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Things To Consider Before Buying An Annuity

Regular income is one of the necessities of life. An annuity for retirement income is a personal choice that depends on your individual circumstances and financial goals.

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Amit Sethi
May 31, 2023
Things To Consider Before Buying An Annuity

The search for a balance between returns and risks is a perpetual one. On one hand, we seek high returns but on the other, we crave some degree of certainty on returns. These two do not often go together. A high return may be possible but the risk will be equally high. Low-risk instruments tend to give low returns. The rules and objectives of investments are simple. It is just that at different stages of life, we have varied risk appetites and hence our investment options also vary. Let us find out how important are annuities for generating regular income post-retirement.

An annuity is very similar to a pension scheme. You invest money, either as a lump sum or periodically and the insurance company will make regular payments on reaching a particular age, till a fixed number of years or till death.

The usual practice is to invest regularly in an annuity scheme in your working life and get a regular income after retirement.

Are They Good Retirement Option

The answer to this question depends on your specific financial needs. For a person who already has a significant asset size and liquidity, the annuity may not be a good option. However, most people work their lifetime and look for a secure and safe retirement life after a certain age.

So, ask yourself, what would be your financial needs after you retire?

Safety Of Your Assets And Investments

The first requirement is the safety of your assets and investments. Unlike at young age where you can overcome any large mistake or loss in investment by working harder and earning more, old age does not give you this option. Investment once lost is lost forever. Putting money in riskier investments to recover the losses will only damage your finances further.

To secure your investment, annuities are a good option. Their returns are low but the risk is almost nil. The insurance company invests your money in low risks investments which ensures the safety of your investments.

Regular Income To Support Your Lifestyle

The second requirement is that your investment should give you a regular payment. In old age, there is a limited source of income. Annuity adds to your income inflow. Any addition to your regular inflow is good because it gives you more financial flexibility. Annuities offer the advantage of guaranteed income, which can provide peace of mind in retirement. Depending on the type of annuity, you can receive regular payments for a specific period or the rest of your life.

To summarize, you can certainly invest in high-risk assets such as equity mutual funds or direct equity, but keep a part of your investment for low-risk options such as annuities. Annuities typically involve deploying a large sum of money to an insurance company in exchange for regular payments. Once you’ve purchased an annuity, you generally lose control over that principal amount. If maintaining control and flexibility over your investments is important to you, an annuity may not be the best option. Ultimately, the decision to invest in an annuity should be based on a comprehensive evaluation of your financial situation, goals, and risk tolerance.

 

The author is an Independent Financial Journalist

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