The Advantages and Disadvantages Of Variable Annuities

Investors buy annuities for many different reasons. Some simply buy them as an additional form of investment, some buy them as part of a pension/retirement fund package and some are given annuities as part of a structured settlement compensation deal. In addition, some investors take this route for long term financial gain and some for immediate returns.

The advantage of an annuity as a whole is the fact that this kind of investment product is designed to give you a regular source of income when you actually start drawing money from it. So, for example, you will earn more in this way than simply leaving your savings or pension fund sitting in a standard savings account in the majority of cases. Your annuity here will pay you a specific income to the schedule you originally set up when you purchased it.

There are two primary types of annuity to choose from here: fixed annuities and variable annuities. Variable annuities are probably the most commonly used when people look for long term investments that will pay out in years to come. So, what are the advantages and disadvantages here?

You will know from the word go what a fixed annuity will pay out as it is ‘fixed’ to pay the same return at the pre-agreed times. A variable annuity, however, is not fixed in the same way. So, for example, if the funds in which the annuity is invested rise because stocks and shares rise generally, then your fund will grow bigger. With a fixed annuity here you would not get the rise built into your annuity due to its nature.

So, a variable annuity could well give you a bigger income in the long run. This is usually the route chosen by people looking for a long term investment as they know that markets tend to grow faster over time than other saving sources. But, what happens if markets drop?

This can give a disadvantage to a variable annuity. If the investment markets in which it is wrapped decrease in value then so will the annuity. So, your income here could well go down. This wouldn’t happen with a fixed annuity which is designed to stay constant.

Given that most people invest in annuities for the long term rather than the short term, the variable route is most often the option of choice here. This gives your investment room to grow so that you potentially have a greater source of income when you come to draw on your investment.

You should not buy any annuity before taking considered and qualified advice on which type will best suit your individual circumstances. In some cases your age and income needs may well dictate that a fixed annuity will be your best bet, for example.

If, however, you have some time to play with and are willing to take a smaller risk to get a greater income then most annuity experts will recommend that you look at a variable investment here to make sure that you get the highest possible returns in the long run.

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