Remember when pensions were part of every job and every retiree had one? Pensions were great; they paid the pensioner a fixed sum each month for his or her entire life and in most cases, at least a portion was paid to the surviving spouse at death. While pensions may be a thing of the past, the concept of a qualified retirement benefit that pays a guaranteed monthly amount for life is not. Instead of a company pension, they now take the form of self-funded immediate fixed annuities.
Immediate Fixed Annuities
Immediate fixed annuities may as well be a distant cousin to pensions in the way that they provide and guarantee a retirement benefit. Some of the similarities include:
- A guaranteed monthly payment for the life of the annuitant, regardless of the actual growth of the underlying principal.
- Optional death benefit for surviving spouse – for a smaller monthly payout, if the annuitant dies before he or she has received enough payments to equal a return of principal, their beneficiaries will continuing receiving funds.
- Annuities, like pensions, offer a low-risk, guaranteed return. While this return may not be as substantial as that of more high risk investments, it is perfect for conservative retirement planning.
What’s the difference between a Pension and an annuity
While many aspects of the two retirement benefits are similar there are also many differences. The most important difference between the two is that an annuity is self-funded whereas a traditional pension is funded by the pensioner’s employer. This difference introduces a number of considerations that you must make before you buy an annuity-considerations that would not matter in an employer-sponsored plan, like:
- Because annuities guarantee you a certain payout based on the original contribution, you generally can’t remove additional funds after you’ve purchased the annuity. That means that if you put your life’s savings into an immediate annuity you may no longer have access to the funds in the event of an emergency. Now there are some newer products on the market that do offer increased access to funds, but you usually give up something in return such as a lower monthly payout.
- If you do have access to the funds and you remove a lump sum there will be surrender charges imposed. This could not only negate any interest growth you’ve experienced but could cut into your principal and will reduce the monthly income paid out by the annuity.
- Your heirs will generally not inherit any of the remaining annuity value after your death. While this may not be a concern in an employer-sponsored pension, it should be considered when making a contribution to a straight life immediate annuity.
If the concept of an annuity for funding retirement benefits appeals to you talk to your agent about the many flexible annuity products available. You may find that while a straight life immediate annuity does not fit your needs, a joint and last survivor or period certain annuity does.
We have access to these products for as low as $50.00/mo. They can be a Roth IRA, Traditional IRA, or a non-qualified account.
Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1/2, may be subject to a 10% federal income tax penalty.
Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.