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Investment Annuities
While annuities
are usually taken out for retirement purposes, they can also be
a good form of investment. Usually, an Equity Index Annuity or
a type of Variable Annuity is ideal for this purpose. Keep in mind
that these types of annuities carry some amount of risk. For instance,
an annuity linked to an interest rate could drop below a desirable
level. Your annuity contract can normally be negotiated to include
a “floor” to make sure that no matter how poorly the
associated interest rate is performing it will never go below a
specific figure.
A floor can apply
to the lump sum as well, which means you won’t
have to worry about losing more than 10% (or even 0%) of your initial
investment. Also, your chosen interest rate may be doing well and
your money is increasing in terms of pounds and pence, but inflation
can mean that your income is actually decreasing in real terms.
| Future
buying power of £1,000 |
| Inflation |
5
years |
10
years |
15
years |
20
years |
25
years |
| 1.5% |
£928 |
£861 |
£800 |
£742 |
£689 |
| 3.0% |
£863 |
£744 |
£642 |
£554 |
£478 |
| 5.0% |
£784 |
£614 |
£481 |
£377 |
£295 |
| 8.0% |
£681 |
£463 |
£315 |
£215 |
£146 |
|
As
the table illustrates, any standard annuity is vulnerable to money
loss in real terms as years go by. One good measure
to protect your investment against this is to use a device
commonly seen in retirement annuities called escalation.
For instance, the RPI (Retail Price Index) Escalation device
ensures that your capital’s purchasing power will keep
in pace with inflation. This results in less income for your
investment but it’s something to consider during periods
of high inflation, especially for a long term or life annuity
buyer.
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