Deferred fixed annuities
Deferred annuity is a product which is designed in such a manner that the funds invested by a customer are accumulated over a fixed duration and are payable after the deferred date. When the minimum rate of return is mentioned in the contract we call it a fixed annuity plan. Apart from this the customer also needs to mention the date from which he is willing to receive the returns in form of installments. Income tax is also deferred in fixed interest rate deferred annuity plan, this means that the earnings will keep on accumulating as per the performance of the fund or the minimum payout whichever is applicable as per the contract and the tax will be deducted when the customer starts receiving the returns in the liquid form. The concept is simple to understand, interest on the total amount you pay to the company will keep on accumulating and after a predefined date that amount will be used to pay life long pension to the customer. The fixed annuity product is a specialized product which takes care of your retirement needs very well.
Well every investment depends on the need of the investor, so while you choose your instrument for investments that you intend to make you must be very clear about your financial situations and projections. It is not suggested that an annuity plan suits everyones investment objective; some may benefit more from a fixed deposit.
In reality both fixed deposits and fixed annuity investments are specially designed financial instruments which ensure wealth creation and accumulation for long term investors. However, both these financial instruments vary a lot in nature and benefits, the first thing one need to do before investing his capital is to identify the correct and the most suitable instrument that has the potential to satisfy his financial needs.
To elaborate and compare the two investment tools in depth lets do simple comparisons between a fixed deposit and a fixed interest deferred annuity owned by an individual.
While we continue with the exercise you must identify your objectives that you need to fulfill with your investment. Knowing your targets and the flexibility of the product offering helps you better allocate your resources.
Objectives-
Guarantee return of Principal amount-
Here in both the cases, may it be fixed deposit or fixed deferred annuity, security of the investment is the key feature. In case of fixed deposits principal amount is guaranteed by the government. In case where the amount is huge one may exercise the option of risk cover while getting into the contract with the banking institution.
Deferred fixed annuities are not as secure as the fixed deposits with the banks as they are not guaranteed by the government, but the risk feature remains very low as the insurance company provides the customer with full insurance cover. Even in the United States, the annuities are not guaranteed by the government as it is the case with fixed deposits up to a certain limit. Fixed deferred annuities are solely reliable on the smooth running of the insurance companies business. So while fulfilling your security objective you must keep in view the financial reliability of the insurance company so that you do not get into contract with a poor performing company. The easiest way to determine the financial stability of the insurance company is to evaluate them on the back of sound publisher ratings. Moody's and Standard & Poor's are some reliable resources which make the evaluation process easier for an investor.
Shortterm investment
Considering that the time frame that one needs to invest for is short in nature then investing in fixed deposits will prove a better investment as accumulation here will be more than the deferred annuity plans. Fixed deferred annuity plans in there beginning years require lot of expenditure in there proper allocation and processing so they do not give attractive returns to the short term investors. Fixed deposits are ideal in short term as they have maturity period ranging from a single month to a couple of years.
Longterm investment
Deferred fixed annuity is certainly a specialized product offering for a long term investor as the accumulation structure suits to the retirement needs. These annuity plans are flexible during the payout, in some plans the annuity is paid to the legal heirs or the nominee for his/her lifetime even after the death of the contract holder.
Interest Return on investment
fixed deposits may offer a specified rate of interest for a fixed period of time but the rates cannot remain the same forever, rates do change as per the real market scenario and the policy decisions on a continues basis. No institution guarantees the renewal interest rates, generally for shorter durations low rates are offered than the long term contracts in case of fixed deposits.
As far as deferred annuity plans are concerned there is a fixed minimum payout which is guaranteed by the insurer for the initial few years after which the accumulation depends on the performance of the fund in the market. In case of fixed annuity plans the rate of interest to be returned to the investor keeps on fluctuating as per the market condition after the initial lock-in period which guarantees the rate of return.
Tax Savings
when income tax becomes the cause of concern, it is suggested for an investor to go for fixed rate deferred annuity plans as the tax is also calculated on the deferred date and the interest is accumulated for the complete term till maturity. On the other hand income tax is charged simultaneously on the fixed deposits.
Other important factors which should be considered by an investor while selecting his investment instrument are Liquidity options, distribution options on maturity and one must also read and understand the offer document with utmost clarity.
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