What Are Annuities And Who Needs One?

Annuities, as an investment option, are often seen as restrictive, unexciting and dull. You pay money in, sometimes over many years, and eventually you get paid an income from that money. This is the traditional view of a retirement annuity: it?s the way grandpa saved up enough to keep the wolf from the door after he stopped working. But there are other uses for an annuity that can make it a versatile financial choice in certain circumstances.

Annuities don?t have to be paid in month by month, like grandpa did. They can be paid in as one large lump sum. And then, sooner or later, they can be paid out again as an income. Why would anyone want to do that?

One of the ways lump sum annuities can be used is in the case of high-earning sportspeople or showbiz celebrities. Suppose you are major league footballer and you earn megabucks every week for a few years while you are in your prime. Sure, you want the mansions and fast cars and jet-set lifestyle. But if you?re smart, you?ll put some of that money away in an annuity so that when your high-rolling days are over you don?t have to sweep the floor at Wal-Mart.

The same scenario applies to lottery winners. It is sadly often the case that people who suddenly find themselves millionaires have no experience at handling large sums of money and they spend their way through their good fortune over a few short years. Financial advisors will often recommend an annuity for at least some of that money so that it translates into some long-term security when the spending is over.

And another way lump sum annuities are used is in the case of lawsuits. If you are injured in an accident and you successfully sue someone, the lawyers will probably negotiate a settlement in the form of annuity. This means that you have an income to pay for your long-term nursing care, for example.

Anytime anyone comes into a large lump sum, an inheritance, for example, it makes sense to consider an annuity as a way of preserving that money so that you can eventually live off it. You can take the income immediately (provided that you are not too young) or you can wait until you really need the money and you can retire off it.

But don?t annuities have a bad press? Haven?t you read complaints from disappointed seniors that interest rates are low and that the expected golden nest-egg turned out to be a pittance? Are annuities really the best place for your money?

The answer depends on your financial objectives. The big attraction of annuities is that they are safe. A fixed-rate annuity is safer than a variable-rate annuity which, in turn, is safer than investing the money in the stock market. If you want the security of knowing that your money is safe and that you will get an income from it no matter how long you live, then an annuity should be at least a part of your investment strategy. Annuities buy peace of mind while blue-chip stocks crash and dotcom bubbles burst.

As with all financial products, watch out for high fees, both on the part of the financial advisor who sells it to you and on the part of the insurance company that will manage the funds. Find out what these are before you buy, and if you are not happy, then shop around until you find a deal you are happy with. Then you can relax, forget about the money and wait.