Practical Finance: Annuities….good or bad?
After the last Practical Finance post some of you asked why I was not a fan of annuities and for alternative investment vehicles. Since I’m not a registered financial advisor and have no intentions of paying any fines or rooming with Keon in Golden Grove, I decided the best approach would be to arm you with some questions to ask your agent or annuity seller and let you decide for yourself.
Full disclosure: I earn my monthly pittance as a Risk Manager, toiling in the cotton fields of a regional insurance conglomerate. However, none of the views expressed here are either endorsed by my employer or reflect their views in any way. It’s all me, so take it for what it’s worth (probably very little).
As Mrs Garlin does say “let’s go!”
What the heck is an annuity? An annuity is a contract between an individual and an insurance company/financial institution that allows you to pay premiums and receive regular or lump sum payments in the future, usually upon maturity of the plan or at retirement.
However, “don’t be fooled, all annuities are not the same”. There are registered annuities and unregistered annuities. Only a registered annuity gets you a ‘bligh’ on taxes from the BIR. If you don’t know which type you have, then you need to sort your life out padna.
An annuity has two phases, the accumulation phase when you’re paying the money and the payment phase when…well…you know nah. There are immediate annuities which, in exchange for a lump sum, starts paying you immediately and there are deferred annuities which, in exchange for a lump sum or periodic premiums, starts paying you at some future date.
Now that we are all on the same copy book page here are some things to ask your agent or annuity bloke/sistren and I’ll tell you why:
Is the company you bought the annuity from the entity actually paying the annuity? Some institutions will sell you an annuity and tell you that you can choose the maturity date (some time between your 50th and 70th birthday) when you can get a 25% lump sum payment and the remaining 75% will be used to purchase an annuity from an insurer of your choosing. So….why didn’t you just purchase straight from that entity rather than pay this middleman’s fees? Ask dem dat too.
Speaking of fees….The next question you might want to ask is, are there any fees associated with the annuity and if so are they charged upfront, spread out over the life or charged at the end? Why? Well because of the magic of compounding. If you pay the fees upfront you have less funds compounding year on year than if you paid it at the back end.
Which brings me to the returns. Arguably the real value in a registered annuity is the tax deduction. That was painfully evident when I did a quick calculation of the returns on my registered annuity at one institution. Hold on to your chairs….I earned a whopping 2.44% annual return over 14 years. Ok, so now ask your annuity dude/dudette “what are the returns on your unregistered annuity?”…since those have no tax deduction benefit and should be earning a proper “big-boy” return.
Another good question to ask is whether your annuity payments are fixed or linked in some way to inflation. To be honest I’m not even sure if mine are or if that is even an option in sweet T&T. Generally though, I’m not a fan of receiving fixed payments with anything…whether it’s annuities, NIS or support from my “sugar mommy”.
This last question is for yourself, how much is your annuity projected to pay you when you start receiving payments? If you don’t know, ask your annuity gal / man for the projections. How yuh go know if you winning the game if you don’t know the score?
In hindsight, I probably should not have given the impression that annuities are bad. Annuities definitely have a place in a well balanced portfolio. They help instill the discipline of saving for retirement and personally, I think everyone should take advantage of the tax deduction they offer.
Better yet, if you could use the amount of the deduction to put toward your retirement rather than spending it on current consumption, then you would be a proper retirement planning ‘banton’. When it comes to unregistered annuities though, sometimes the returns are very flaccid…I’m definitely not a fan of that.
My biggest beef with annuities is that I don’t think they’re sold properly or that people understand what they’re buying and how it fits their future needs. Let’s hope I don’t get any calls from angry agents or my employer.
TANA