1 of 1

Write now Article Tools

Originally, annuity providers designed annuities to provide guaranteed lifetime income for annuitants. This intent branded annuities as a retirement solution to the risk of outliving your life savings (longevity risk). However, annuities are merely a tool; you must use them appropriately to have a positive outcome for your retirement plans. Too often, annuitants make critical mistakes when utilizing annuities as a retirement solution or alternative.

1) Undue dependence on annuities

Annuities are only part of the solution to longevity risk. If you depend too heavily on an annuity contract to finance your retirement, you are putting yourself at a disadvantage. After all, there are both pros and cons of using annuities for retirement income. If you invest too heavily in an annuity, you simply exacerbate the demerits.

An annuity is an income option that has its place in a diversified retirement portfolio. However, undue emphasis on an income stream over retirement savings can weaken your retirement plan. It is recommended that you use other income and growth options in conjunction with annuities, particularly when you have a long investment horizon before retirement.

2) Failing to consider the estate implications of annuities (particularly immediate annuities)

Annuities are estate-liquidating financial products. They convert your cash asset or accumulated fund into an income stream. This suggests that having an annuity reduce the actual or potential value of your estate. For instance, if you convert a lump sum of $100,000.00 into an income stream, that $100,000.00 is no longer part of your estate, although the much smaller proceeds from it would add value to it. Failing to consider the estate implications of annuities involves missing the opportunity to use them as estate-planning aids and using them to the detriment of your estate value.

3) Failing to consider the tax implications of annuities

Qualified annuities generally offer tax incentives in the accumulation phase. However, in the annuitization phase, annuity payments may be taxable as income. Income tax is higher than capital gains tax- a fact that further erodes the value of your lifetime annuity payments. The upside to this is that tax deferred growth offers a significant advantage in the accumulation phase. Tax treatment of annuities is also favourable for immediate annuity payments. Payments received from an immediate annuity are not taxable. Lack of consideration of the tax implications of annuities

• 1
• 2
• next page >>

Add your voice

Know something about Common mistakes made when persons use annuities for retirement income?
We want to hear your view. Write now!