Of all types of income generating investments, annuities are some of the most controversial. There is a body of opinion that says they are a complete waste of time and you would do much better if you were to place the capital sum on the stockmarket or invest in property. But then again the stock market has been known to crash and property has frequently been known to decrease in real value, so if security is high on your list of priorities maybe annuities are worth a thought after all.

Annuities are popular as vehicles for pensions, perhaps mainly because they can be very tax efficient. If money is wrapped up in this investment it takes a tax holiday until such time as the premiums become due and payments are made. As this is likely to happen after retirement the tax liability falls dramatically.

There are two types of annuity. The former is deferred, which means payments are made, usually on a monthly basis for a number of years. This is a good way for the younger person to acquire an income later in life. The other variety is the fixed version. In this package, the purchaser pays a large capital sum usually to an insurance company and payments begin soon afterwards.

The big enemy of annuities is inflation. At the outset the agreed sum to be paid out might seem generous, but inflation can erode the value of the venture in a very alarming fashion.

On the other hand a fixed payment annuity based pension provides an excellent budgeting tool. You will know each month how much money you will receive and thus in much the same way as a salary, be able to cut your cloth accordingly. This allows for more efficient financial planning.

When it come to tax, there can be penalties if the annuity is cashed in before the ?owner? reaches sixty years of age and this could be a disincentive for those folks who plan early retirement or find themselves made redundant before reaching the official age of retirement. However, as I said before there are some distinct tax advantages, particularly for those individuals in the higher tax brackets. Deferred Annuities are in effect a compulsory savings plan. In those years of high tax liability it would make a lot of sense to save as much as possible because these savings are then tax exempt. Tax is only due when income is received from the plan. That means you start drawing your annuity after you have stopped earning a high salary. It?s very neat because as you have decreased earning your tax liability will drop to a lower level than previously. This all means you have allowed the IRS to partly finance those golden days of retirement. Now that begins to appeal does it not?

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