Investment in a single premium annuity provides steady income for a specific number of years or until the annuity holder’s death. Investment minimums and income amounts vary, but many people sign various annuity contracts to ensure guaranteed payments during retirement. You can defer payments to a later date or obtain an immediate annuity that provides current income.
Many single premium annuities guarantee that you will earn a minimum rate for the duration of the contract. Most other investments are susceptible to rate fluctuation and involve more risk for the investor. You do have the option of selecting other investments, such as bonds, that offer a guaranteed rate, but they often provide less attractive earnings. As a disadvantage, some single premium annuities do not include rate adjustment for inflation, which means you could end up with less return in the future.
Single premium annuities require one-time investment. For example, you may choose a single premium annuity that requires a $20,000 minimum investment, and you can use retirement money, severance pay, a divorce settlement or even an inheritance to fund it. Once you pay this lump sum, you don't need additional money to invest. In fact, even if you want to invest more in the annuity, you won’t have the option of doing so. Some people consider the single investment a pro, as it makes for a hassle-free investment. You may consider it a con if you don't have the initial cash outlay or you would rather not commit a large sum of money to a single contract.
In exchange for your lump-sum investment, you get guaranteed income. Depending on the annuity you choose, you can receive this income every month, quarterly, twice a year or annually for the length of the contract or until you pass away. You may consider this steady income a pro, as you don't have to analyze investments, sell or buy anything, or work for the money after your initial investment. As a con, you'll need a large investment to receive substantial income.
Though investors and investment professionals usually call single premium annuity income guaranteed, you still face some risks. With this type of investment, the guarantee is only as strong as the company that offers it. If the insurance or investment company that holds your annuity contract suffers financial problems and goes bankrupt, you could lose a substantial amount of money. While this is a drawback, you can reduce your risk by researching an insurance company and checking its ratings with companies like Standard and Poor’s and Moody's before investing.
Taxes and Financial Penalties
Your earnings from a single premium annuity are subject to taxes. As a pro, you can defer taxation until you start receiving payments. As a con, the earnings for this type of annuity are often subject to ordinary income taxes once payment begins. With some exceptions, you will face a 10 percent early withdrawal penalty if you withdraw from the annuity before you reach 59 ½ years of age. You may also face fees if you decide to end your annuity contract early. Often, companies charge a percentage of your investment's value as a penalty for early termination.
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