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Different Types of Annuities

A number of different annuity types are available. For example, a fixed annuity is the kind usually included in a retirement fund. There are also many other types for investment purposes--the investment linked annuity, for instance, and the split annuity which is a hybrid set-up.

// Fixed
The most basic type of annuity being offered, it is “fixed” in the sense that generally it cannot be exchanged back for cash. Mainly, however, this refers to the fixed rate of interest set at the start of the contract. This is usually whatever the current rates were when the contract was drawn up, though this is negotiable.

Regardless of the agreed-upon rate, this will stay the same for the duration of the annuity, which may range from life, to an agreed number of years set in the contract. A guarantee period may cover this annuity, which is also negotiated and set in the contract.

The amount you put in is built up during an accumulation phase before payment begins. Then your money is increased, or decreased, through investment. This either takes the form of a mutual fund, or an equity linked investment. The risk is greater but these investments can deliver a higher return.

Fixed annuities are appropriate for those who can afford to invest earlier in life, with the benefit of avoiding taxation until they retire, compared to Variable Annuities which may take a while before giving payments back.

Also called With-Profits Annuities, they are commonly connected to a larger financial company’s investment system. Since there are a number of options, look around and compare first before deciding on which is best for you.

// Variable
The main difference in a Variable Annuity is it’s flexible interest rate, unlike Fixed Annuities. Also, some Variable Annuities may be tax deferred, thus tax only applies to yearly pay-outs but not on the money collected during the accumulation phase.

// Flexible
The advantage of a Flexible Annuity is that you have control over how your money is to be invested. For instance, you may opt to transfer some of your funds out of a slow performing unit trust to a better performer. You can also change the type of investment your capital is placed in--from equities to bonds, for example. Managed effectively, Flexible Annuities can often yield good profits for the investor.

// Deferred
In a Deferred Annuity, the accumulation phase can take place over a long duration before the premium matures and the pay-outs start. This is the opposite on an Immediate Annuity.
Taxes are not usually applied until the annuity payments begin. This makes it a good choice for a compulsory retirement annuity.

// Immediate
The opposite of a Deferred Annuity, an Immediate Annuity is a type of fixed annuity that can begin paying in as early as thirteen months following the payment of a lump sum premium. This can be covered by a guarantee period, otherwise it can last for either an agreed period or for life.

// Capital Protected
A Capital Protected annuity guarantees that the overall annuity payments will not be less than the amount of the purchased annuity.

// Split
This is a combination of a single Immediate Annuity and a single Tax Deferred Annuity. The original investment is divided between each type, thereby ensuring that you generate sufficient income over the years to live off. Additionally, this means that by the time your annuity is over, your capital is restored to an amount comparable to your original premium.

// Compulsory Purchase
A Compulsory Purchase Annuity is a type of retirement annuity that is funded by your personal pension. This is usually the remaining amount of your pension that isn’t withdrawn tax free.

// Lifestyle/Impaired Life
These annuities have bigger pay-outs than normal annuities because they are intended for people with health or lifestyle issues that may result in a below-average life expectancy.

// Temporary
These type of annuities are not guaranteed and carry more risk than pension annuities. The term is usually between five to fifteen years, or you may opt for more. Temporary Annuities are a useful method of investing money.

// Guaranteed
These annuities are covered by a guarantee period that ensures that payments will continue to be made to the annuity holder’s estate for a length of time stated in the contract.

// Escalating/Increasing
Escalating or Increasing Annuities start out with low payments that go up as time passes. This is a measure against inflation. The size of the pay-outs is linked to either the Retail Price Index or the inflation rate.

// Purchased Life
Purchased Life Annuities are non-compulsory annuities that are funded outside your pension plan. As the name implies, the period is for life. The amount of your payments depends on the age you start your annuity, and is higher the older you are.

// Equity Index
These annuities do not have a fixed interest rate in the contract. Instead, it is linked to an equity index or a particular stock’s value. To keep your interest earnings high, a “floor” value is usually applied to the rate. This value should stay at least 90% or above of the agreed premium.

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