In uncertain financial times, people look to a guaranteed income when they retire and a guaranteed annuity is an option to consider. Obviously when you seek guarantees on anything, you will need to sacrifice something in order to get that guarantee. Guaranteed Annuities guarantee you an amount of money over a period of time but it is important to distinguish between the different types of Guaranteed annuities, choose the initial pension carefully.
There are essentially five different types of Guaranteed Annuities.
Level Annuity
This guaranteed annuity offers you the exact same amount of income from your first payout right to your last. This may sound attractive but when we factor in inflation and the number of years you are likely to live and require the income, the picture changes significantly. The buying power of your money will reduce by between 20% and 30% every six years at the current inflation range of 3%-6% per annum.
Enhanced Annuity
If you are not healthy or have a condition that is expected to shorten your life, some insurance companies offer enhanced annuities which are designed to pay out higher amounts of income on the basis that your life expectancy is much lower.
Escalating Annuity
The Escalating annuity is designed to start out at a lower income level and escalate over time at either an inflationary linked level or at a pre-determined percentage. It is important to consider what your income needs will be as you grow older, perhaps you expect to need additional income after 10 years for medical expenses or other expenses which tend to increase as we get older. In this case you could elect to increase the amount you receive on an annual basis by a few percentage points above inflation to give you more buying power as time progresses.
Capital Back Annuity
The Capital back annuity is essentially a hybrid life insurance policy which has a life portion and an annuity portion designed to provide for your family after your death. This type of policy can become very expensive as you grow older as the life premium will increase significantly.
Guaranteed for Life Annuity
The Guaranteed for Life annuity pays you a guaranteed amount for a selected period between 10 and 20 years. If you live longer than the guarantee period there will be no lump sum payment to your beneficiaries when you die but you will continue to receive a pension. If you die before the gurantee period is up, the Annuity will be paid out to your family.
Selecting the right fit for your circumstances is not a simple one and we always advise that you consult a authorised financial planner to help you make the right decision for your retirement income. Want more information? Read about Living annuities
