Retirement annuity plan is a financial product that ensures regular income to retirees in later years.
Time intervals between distributions as well as their amount are defined by conditions and type of the annuity between issuer organization and client.
Nowadays many types of retirement annuities are offered on the market.
When individuals decide to buy an annuity they agree to pay a lump upfront or to make regular deposits to the insurance institution.
The money individuals pay to the insurance companies is then reinvested into the market.
Money grows until the day when an individual decides to retire.
[2] The payback phase starts as soon as distributions are paid to the insured individuals.
Payments could be distributed for a predetermined period of time (e. g. 15 years) annually, semi-annually, etc.
Payments could be paid immediately after the retirement of an individual or after some period of time.
Individuals that enter into a fixed annuity have the opportunity to decide ahead of time how much they will receive when the distribution phase begins.
Generally, fixed annuities are conservative insurance products as the rate of return is approximately equal to the rate of return that certificate of deposit (CD) would offer.
The final value of distributions that would accumulate from investments an individual had made during the accumulation phase is directly dependent on the performance of the investment options that would be chosen by the client.
Individuals typically use mutual funds that invest in market instruments, bonds, and (or) stocks.
A deferred annuity is often used to organize pension payments - the accumulation phase in it can last until a certain age of the annuitant.
An immediate retirement annuity is an annuity that is purchased in a single lump sum, and payments on it begin immediately (30 days to 12 months), after the entry into force of the contract (there is no accumulation phase).
An immediate annuity is good for turning a large amount of money into a source of permanent income (some kind of pension).
It is not widely used as there is no accumulation phase, but it is suitable for rich people that would like to retire and purchase a passive source of income.
[7] Another great benefit of an annuity is that it is not taxed until the payout phase.
The annuitant is responsible to pay the taxes on the distribution, but generally on the income earned on top of the original investment.
[8] This insurance product is very flexible and there are many types of annuity plans that can suit almost anyone recording to their own preferences.
Comparing to other financial instruments such as investing in mutual funds and certificates of deposit.
As retirement annuities are often sold by intermediaries the cost of commission is shifted to a buyer.
[10] Very often individuals who closed deferred retirement annuities will have to pay a surrender fee if they unexpectedly will withdraw funds during the early years of the contract.
However, most annuities allow for emergency purposes a penalty-free withdrawal, which varies from 10% to 15% of the account.
Calculate a lump sum payment that an individual should pay to the insurance organization, in order to in 20 years receive monthly distributions in the amount of $500 for 5 years, assuming a constant annual rate of return 12%.
Calculate a lump sum payment that and individual should pay to insurance organisation, in order to for the next 20 years receive annual variable distributions.
Contributions receive basic tax relief claimed at source (although this was only introduced in 2001).
The tax-free cash lump sum is calculated with reference to the initial annual income.
The formula is often described as: the tax-free cash is equal to three times the residual income.
[11] This tax regime was abolished under pension simplification introduced on 6 April 2006.