by Jonte Rhodes

Created on: May 19, 2008

Annuities began as part of many life insurance policies which included a payment on death option. However now they are more commonly known as simply a way to make money faster than using a standard savings account. They basically work as if you have given the life insurance company a loan, which they will then pay you back in increments with interest and or gains on the original sum. The main bonus being that the sum being held is not taxed until it is withdrawn. Meaning that in effect you have more money earning interest than you would with a bank account where the tax is already deducted. Both will give you an income usually for the rest of your life, unless you decide to remove a lump sum. And both are fairly safe ways of investing your money.

Annuities have become an almost essential part of any retirement plan these days. However before you begin to invest in one you will need to decide which type you want. Namely the fixed rate annuity and the variable rate annuity. There are several differences between the two that you should consider before you go for one or the other, and that could potentially make a lot of difference to the return you will get on your investment.

A fixed annuity is the most simple to understand, calculate and also the most reliable. With fixed rates you will receive a guaranteed amount of interest on your money for the life of the contract. Although there are often variances to this meaning that you will usually get a higher first year rate and then a guaranteed minimum amount afterwords. These are also linked to a predetermined stock market index, which slightly affects the rate of interest you will get.

With a fixed rate annuity there are often caps on how much you can make and you will not receive any of the index dividends that you can with other types of investment. However in return for this concession you can never have negative interest on your investment. That of course is the risk with other investment structures if for example the economy takes a knock. That all meaning that they are a safe and reliable way to invest, if a little unadventurous. They are also easier for use in financial planning for the future as you can work out what returns you will be getting each year. This by contrast of course is impossible to predict accurately with a variable rate annuity

Fixed rate annuities are basically a safer way to make more than you can with a bank, but not much more. The interest rates are also calculated at the time you take

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