When it comes to buying an annuity, it is important that you take time to shop for the one that gives you the most benefits and convenience.
Pension providers offer different deals and these differences, even the smallest kinds, can make a significant impact to your income.
If an annuity helps to meet your needs, here’s what you need to consider when shopping for an annuity:
- Do the math for the payout.
You need to know how much monthly income you are likely to receive. Compute for the payout based on the sum you plan to invest.
- Confirm the strength of the annuity.
Be sure to only purchase annuities from renowned financially strong insurance companies. You can check their ratings by visiting sites that provide comprehensive information of companies in the insurance industry such as A.M. Best or Fitch Ratings.
- Be sure to check returns.
Make sure that you thoroughly look at how an annuity’s investment returns are calculated. Because of higher fees and expenses, the returns on funds offered by insurers tend to be lower than equivalent open-end mutual funds.
- Calculate the expenses.
You need to know exactly how much you’ll be charged in expenses, commissions and fees. Decide to go with variable annuities that charge no more than 2%.
- Remember to ask about the death benefit.
Think about boosting the annuity’s death benefit. You need to ask yourself what will your spouse or partner receives if you die before deferred-annuity payments are due to begin.
- Increase surrender fees.
Do you know what you will be charged if you decide to cancel the annuity and withdraw your savings? There are annuities that charge a penalty of 6% or 7% in the first seven years.
Also, your gains are going to be taxed as income, and you’ll face a 10% penalty if you’re under age 59 ½ at the time of withdrawal.
- Look into low-fee annuities.
Variable annuities offered by major mutual fund companies like Vanguard, Fidelity and T. Rowe Price tend to charge lower fees—around 2%.
Don’t forget that inflation can undercut the value of a fixed monthly payment for life, especially after income taxes are paid. And also, Sales pitches will always sound good, but they still must be carefully evaluated.
For example, many insurance companies encourage you to roll your IRA into an annuity. But annual annuity fees can be as much as 3%, which is much higher than other long-term investment vehicles like mutual funds in an IRA or 401(k), and your rate of return could be lower than expected.
Fees charged by insurance companies on annuities can be relatively high, which eats into your returns over time. Along with this, calculations used by insurance companies to determine rates of returns on some investments are complex and can suppress long-term earnings.
Returns on an annuity investment over time might have been higher if assets had been invested in non-annuity mutual funds. Remember that cashing in an annuity to withdraw your invested assets can be costly, because you may have to pay surrender charges to the insurer.
Some annuities’ rules force your beneficiaries to forfeit part or all of your investment if you die.
Remember that some pension providers specialize in providing annuities that are designed for people that have medical conditions or follow a lifestyle that has a shorter than the normal life expectancy. Some providers may take where you live into consideration.