How do you take advantage of annuities

I’m 35 year-old worker in the energy sector, and am always looking at ways to save for my future. I’ve been hearing a lot about annuities but don’t fully understand what they are or how they work - especially as there seem to be a variety to choose from. Can you help to clarify?

There are indeed a range of annuities, so it is important to understand the differences.

A life annuity is a financial contract in the form of an insurance product where a seller (issuer) – typically a financial institution such as a life insurance company – makes a series of payments in the future to the buyer (annuitant) in exchange for the immediate payment of a lump sum (single-payment annuity), or a series of regular payments (regular-payment annuity), prior to the onset of the annuity.

The income paid by the issuer to the annuitant continues until the date of death of the annuitant. At this point the contract terminates – unless there are other annuitants or beneficiaries, and the remainder of the fund accumulated is forfeited.

As a result, the annuitant receives a guaranteed income that has been paid for out of savings. It is often the case that the income will be fixed for life, and its value will be eroded by inflation over time. Many believe that purchasing this type of annuity should only be considered later in life. It is also generally better to wait until interest rates are at a reasonably high level, since your annuity will be fixed for life at that rate.

Variable annuities are complex and, arguably, controversial investments. Salespeople may present variable annuities as having the growth potential of a mutual fund with the security of insurance, thereby allowing you to invest in the stock market with a safety net. However, many consumer advocates argue that variable annuity fees are so steep that it can take a considerable amount of time to outperform more straightforward investments.

A variable annuity is basically a mutual fund investment wrapped in an insurance contract. You make payments during the accumulation phase that are deposited into investment sub-accounts that fluctuate just like comparable mutual funds. When you begin the payout phase, you get your principal plus any gains or losses as a lump sum payment, or you can annuitize the same amount into a series of monthly payments.

As its name implies, the variable annuity’s rate of return is not stable because it will vary with the performance of the underlying investment (sub-account). There are many different investment options for the sub-account similar to mutual funds with comparable risk and return profiles. The value of your investment will depend on the performance of the sub-account investment option you choose.

Finally, an indexed annuity is a fixed annuity, either immediate or deferred, that earns interest or provides benefits that are often linked to an equity index. The value of the index might be tied to a stock or other equity index. The value of any index varies from day to day and is not predictable. When you buy an indexed fixed annuity, you own an insurance contract instead of buying shares in a stock or equity index.

Annuities are a complex area and you may find it beneficial consult with an independent financial adviser before making any decisions. He or she can have a detailed discussion with you to better understand your goals and needs and then advise accordingly.

Roy Gaunt is Chartered Insurance Broker, Nexus Insurance Brokers. Opinion expressed here is his own and do not necessarily reflect that of Gulf News.