There are many tools and options when it comes to investment planning, especially for retirement. More often than not, you want an instrument that will guarantee an income that you can rely on when you are no longer earning. Annuities were developed to offer such an outcome.

“Many people think of annuities as a type of insurance, which it is in way,” said Richard Cayne of Meyer International. “But there are many types offered by various financial institutions that suit different needs.”

Annuities explained

Annuities are contracts. You pay a lump sum or predetermined instalments to a financial institution that then agrees to pay you, either in a lump sum or in instalments, now or some time in the future. Most people invest in annuities either for retirement planning, where the payouts become income. Or, as part of estate planning, to guarantee income to beneficiaries after death. A major benefit of annuities in these cases is that the money you pay into an annuity is tax deferred until you start receiving payments.

Annuities can be structured in different ways. Generally, they can be fixed, where you are guaranteed a certain interest rate and payment for a set period of time; variable, where you have some control over how your investments are directed; and indexed, where the issuer offers a mix of underlying investments, usually linked to a major market index.

Are annuities as stable as they seem?

Depending on the type of annuity, you could look forward to a set income after you retire and are no longer earning a salary. However, annuities are still investment instruments, so you should review any terms, conditions, and prospectuses carefully. And if the annuity invests in other instruments, such as mutual funds, you should investigate those, or how allocations are made.

Furthermore, there will most likely be fees. In addition to administrative fees, there may be fees and expenses for any underlying investments. You will want to make sure that you know about these costs and factor them into your decision. As you go through your annuity options, you may want to confer with a trusted financial expert, like Richard Cayne, who can answer any questions and help you decide which direction is best for you.