Annuity interest rates go up and down as they are more influenced by the rates of other fixed-income investments. But the redeeming feature is that when the interest rates decline, the annuity on fixed annuity interest could be lot more desirable than any other returns made available from fixed investments. For example, at the time of this post Sept 20, 2011, the yield on a 10 year treasury security is 1.94%. The rate on 10 year multi-year guarantee annuities (MYGA) is 3.85%.
The fixed annuities have particular distinct advantages:
• The rate of interest involving fixed deferred annuity interest guarantees a minimum return in the tenure of the contract. As an illustration, if you opt for MYGA that locks in the current interest rate for a period of 10 years, it is going to get you competitive annuity interest for the complete contract period. At the end of the contract period, you are free to renew or move the funds to another company.
• Yet another benefit may be the annuity interest are tax-deferred. In other words the interest profits on the annuity's principal amount can compound without the liability associated with current taxes. This is unlike numerous fixed income investments including bank CDs or government bonds that are taxed as you earn the actual interest, even if you don;t withdraw it. The tax deferral advantage not only gives annuity interest an edge over other types of fixed income, it can even help retirees reduce social security tax.
• Be aware that some annuity companies, in order to attract investors, offer annuity interest bonuses during the first year. This specific additional annuity interest could inflate the actual yield over the contract time period. But premature withdrawals through could mean surrender expenses that will negate the bonus advantage. Again, annuities that provide bonuses may carry higher and extended surrender periods when compared with annuities that are without bonus annuity interest. This is to say, any extra annuity interest will often have an offsetting feature and in this case, it is typically an extended surrender.
Lastly, you control the tax deferral feature of annuity interest. If you so choose, it's also possible to defer availing yourself of money from your annuity and as a result, delay income tax payment. You can even adjust your payments to make them match to time periods when you will be in a reduced tax bracket. You certainly can't do this type of fine tuning with bank CDs or bonds.
Exercise caution and not get enticed if the annuity interest offered is inordinately high. Obviously, if an annuity pays abnormally high rates, it is indicative of financial issues. It will be prudent to find out the actual financial rating of different annuities before proceeding.
It is essential that you choose an annuity company that is financially steady and not be driven towards a company which offers higher annuity interest. Annuity advantages and guarantees of your insurance company are dependent on its solvency and ability to promptly settle claims. Additionally it is worthwhile to be aware that annuity surrender charges differ from one company to another. You can seek advice from either an independent insurance adviser or a competent financial advisor before selecting a contract for annuity interest.
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