When annuities first became available, a single premium immediate annuity was more popular than other kinds of annuities. Immediate annuity rates were the primary concern rather than rates for the now more preferred, yet more complicated, deferred annuity. An immediate annuity is simpler, needing only one lump sum payment to qualify for periodic income payments upon maturity. Annuity rates remain constant whether the market rises or falls so the payout will be regular and won’t run out. Payout will be received until death of the annuitant of may even continue if the spouse still lives.
Before deciding to go and buy this annuity, however, it’s important to think annuities pros and cons.
Fixed Immediate Annuity
A fixed immediate annuity is a guaranteed and steady income upon maturity. This is usually how annuities work: they provide supplement income for someone’s retirement fund. While deferred annuities wallow in complications and payment problems, an immediate annuity is simple and will provide you with money straight up without any questions asked. It will be a regular payout, usually until death. This means that you won’t outlive this annuity and a constant stream of steady income will mean a lot towards a relaxed life upon retirement. A fixed immediate annuity is usually purchased by conservative investors as it is a safe way to collect retirement funds.
An alternative to fixed immediate annuity is deferred annuity. Deferred annuity doesn’t require a lump sum payment of principal but instead will require a sort of accumulation phase wherein annuity rates are applied little by little which will make your principal grow. Of course, the good thing about an immediate annuity is that the income will be fixed and not dependent on coming rates whereas a deferred annuity is dependent upon market rate. This means that deferred annuities are riskier than immediate annuities.
With these annuities explained, it’s only a matter of knowing whether you’re a conservative investor or not. If you are, then an immediate annuity might just be for you.
Disadvantages of Immediate Annuities
One of the cons of an immediate annuity is that it’s a pretty permanent decision. Paying a lump sum means that you’re truly committed to this and you give up the right to access your principal. Remember that a fixed immediate annuity’s main feature is security and not maximum returns. Regular payouts and a disregard for market rates mean that this kind of annuity won’t have the same potential of a deferred annuity to grow by leaps and bounds. It will be there and won’t suffer losses but it also loses the right to potential gains. Another downside to a fixed income is that it won’t change even if the inflation rate matches it. Whatever the agreed upon payout is, that will be it. Purchasing power will lessen unless the payout amount stays ahead of inflation.
Another con of immediate annuities is their lack of liquidity. Buying an SPIA (single premium immediate annuity) is an irrevocable decision. So unless you’re prepared to really devote these funds to an annuity of this kind, it’s probably better to wait until you’re nearing retirement.