Buy Annuity

A cousin of mine who is a financial planner recently asked me if i was interested in buying an annuity. I know that interest rates are low right now and figure that annuities will pay more if interest rates were higher. Is this true? He told me that the one he sells pays 5-6% guaranteed. Does this 5-6% include principal or is it all interest? Doesn't seem like such a great deal to me. Comments?

Your cousin may be talking to you about an fixed indexed annuity which may produce rates like the ones he claims. It is better to buy a fixed annuity when the longer term interest rates they offer are high. I have some clients locked into 6 year fixed annuities guaranteed to pay an average rate of 5.25% for all years. Most people buy fixed annuities for the insurance company guarantees that come with the product like a guaranteed rate for a guaranteed period of time, a guarantee of return of principal and guaranteed future income stream. These are features that appeal to older, conservative people looking to augment Social Security and pension income. Depending on your age and risk tolerance, a fixed annuity could be for you but you need to have more information about the product. Keep in mind that fixed annuities have no upfront charges however they do have "back end" contingent deferred sales charges (CDSC) that may begin at 7% or higher and reduce to 0% over 7 years or more. Also, be aware that EVERY deposit has it's own set of CDSC's and clients sometime forget about these "rolling" CDSC charges created with multiple investments into the contract. For example, a lump sum investment has only one CDSC period but make monthly deposits into an annuity and EACH deposit has its own set of CDSC's. I'm not saying that it's a bad thing to have these rolling CDSC's but you need to know if that's the case. You need full disclosure before making a commitment. Indexed annuities are the industry "darlings" as they can offer higher "hoped for" returns but come with their own set of "fun facts" that you also need to learn about. Annuities should be purchased for more than the interest rate offered . Taxes, sales charges, time horizon and the ratings of the issuing insurance company should also be considered when deciding to purchase. So, once you have the facts you can make your own decision about whether this type of long term investment is for you.

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It would cost me $27,000 to gain three years toward a six-year vestment in Florida state system.

This depends on a lot of factors. Your age being the primary factor. Based on what you described it is probably best to keep the money where it is at. Keep in mind if not a Roth IRA there can be a penalty for early withdraw.

In the UK, because the government subsidises our contributions, we have to gift 75% of the fund to the crooks running the annuity racket, with their telephone number salaries and even higher annual bonuses. The alternatively secured pension(ASP) to which Joe refers, is only available to Plymouth Brethren and it merely replaces the 75% annuity expenditure by a 52.5% inheritance tax. But at least this goes to the govt and not to the insurance co.

depends on the type of retirement plan. with a defined contribution plan like a 401(k), when you retire you can do a rollover to an IRA. Essentially that money is all yours, but if you take it out of the account you must pay tax on it. Another type is a defined benefit plan, where the employer guarantees a certain payout after you retire. These plans either pay an annuity or a lump sum payment. Often it is the employee's choice which of these payment plans they want. However, some pension plans you can only do it their way...meaning you have no choice. You must get the money the way they say. The other thing that hardly deserves a mention is Social Security. I will probably never see that money since I'm 25 ,and the system is completely screwed (even though I will have involutarily paid into it for my whole working life). But you can elect to receive benefits at age 62 or 65. The earlier you begin to receive those checks, the lower the monthly payment you will receive.

I heard that if you paid into both a government-pension plan and social security, then you are subject to penalty on your social security. something called the "windfall penalty" does this only apply to government-pensions? what about private company pensions? what about immediate annuities that you buy on your own with no company attached? and defferred annuities

I would only buy an annuity if I was mentally retarded or had a traumatic head injury and could not think straight. Leave these for the mentally disabled that are willing to pay outragous fees for a bit of convenience. Plus, they will not bring any benefit in your situation. The penalty is not really a penalty. There is only so much you can collect at retirement from the government. Does not apply to private company pensions (which barely exist anymore since companies do 401K plans now).