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What are your options on lump sum annuity?

We work all our lives to reach age. All throughout, the plan is to have a peaceful time in one’s prime. But in order to live that picture postcard life there are certain important decisions that have to be thought of. How you receive your pension is an important one. Would you like to receive it as a lump sum or would you prefer a fixed interest rate, payable monthly?

If you do decide to opt for a lump sum payout, this could result in a substantial amount of money. You will have to make the right plans for investment. This could mean hiring someone with the capabilities of planning your finances long term. You, after all, will not be having a monthly salary drop into your account anymore.

An advantage to living off the interest of your annuity is that you do not have to worry about the principal amount dwindling. You can take full advantage of the interest rates. Opting for a full payout should be considered only if you are absolutely sure of your investment decisions. You wouldn’t want a lifetime’s worth of savings to be lost out to bad investments.

The monthly annuity scheme works somewhat like getting a salary each month. But it too has its flip side. With a fixed income, you will not be able to factor in inflation. The expenses that you have comfortably covered for a while may not be within your reach for the same amount, in a few years time. Your buying power is bound to decline in a few years.

Another thing that happens when you opt for a monthly payment from your annuity is that your principal amount is stuck at the prevailing rate of interest as when you signed on. Considering the presence financial situation, these rates are often quite low. If you had a taken out a lump sum payment, you could invest it where the returns could be better. You will also have the flexibility of reinvesting when needed. This way you can still have money for your expenses and have some put away to accumulate interest.

Keep in mind that your annuity payments are liable to taxation. Each monthly payment incurs a tax which you are duty-bound to pay. An option would be to take the whole amount and invest it in IRA. This allows you to pay tax only on the amount you withdraw and not the complete figure. Taxes that are incurred with an IRA account will be substantially lower than annuity payouts. You will have to think all these options through.

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• Understanding fixed annuity
• When does annuity get taxed?
• The risks involved with annuities
• Staying abreast of annuity rates
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Monday, May 17th, 2010 Insurance News