The different types of annuities

By | September 23, 2011

Investigating annuities could help you find the most suitable savings plan for your retirement.

Annuities can be highly beneficial additions to any investment portfolio, as well as an effective means of saving for your retirement. However, you should be aware of the different types of annuities available before making your decision, allowing you to identify the options that are best suited to your style of investing and saving.

When comparing various annuity plans, you need to ask questions such as whether there are payment limits or minimum contributions, where your money is being invested and how financially secure your funds will be. You should also ask yourself how much you are willing to invest and what type of investor you are – are you prepared to take risks for higher potential gain or do you prefer the financial stability of regular earnings over time?

Deferred annuities are possibly the most popular type of annuity. With deferred annuities, investors can make regular contributions up to a specified time (usually their retirement) when the annuity matures and pays out at a guaranteed rate of return. Deferred annuities, either fixed or variable, can provide a steady stream of income for the rest of the investor’s lifetime or pay a specified amount for an agreed period of time.

There are several key differences between fixed and variable annuities, which serve to make these respective options either appealing or deterring for investors. Fixed annuities, as their name suggests, provide a guaranteed rate of return throughout the term of the annuity and is based on lower risk investments than variable annuities.

This latter type of annuity may involve greater risk, but can also lead to higher potential gains as funds are invested in mutual funds and stocks. If the economy is favourable and you’re keen to get involved in the markets, variable annuities can be the more lucrative option.

Another type of annuity is immediate annuities, which can spread a lump sum investment into regular payments over time, offering a rate of return for your investment as well as helping you plan your finances more effectively.

Payments from immediate annuities do not need to be deferred and can begin straight away. This type of annuity can be ideal for lottery winners or people who have come into large amounts of money. If you’re close to retirement and looking for a pension plan that offers a guaranteed rate of return and no limit on investments, immediate annuities can also be an appealing option.