The Most Authentic Guide on Personal Finance and Investments

Words of Wisdom : "A successful man is one who can lay a firm foundation with the bricks others have thrown at him." ~ David Brinkley

Disadvantages of buying Annuity

Many people fear that their savings may not last their lifetime. Annuity Plans guarantee a safe and secured return for lifetime. Hence, you hope to sleep peacefully knowing that you will never run out of money. Unfortunately, however, this peace comes at a great expense. So much so that it may be prudent to rather forgo this peace than pay a high price for it.

1. Once you buy an annuity, you lose access to your principal amount. Depending on the type of annuity plan you choose, there would either be no return of principal amount or your nominee will be returned the principal amount after your death. In case you need lump sum money, annuity plan would fail to help you.

2. As a corollary to the above, you have no option to prematurely withdraw your investment in an annuity plan. Hence you have no flexibility to restructure your investment, if required, due to any change(s) in your financial circumstances.

3. The returns are fixed at the time of buying the plan. Therefore, you will not get the benefit of any increase in the rates thereafter. (Of course, you are protected against the risk of falling interest rates.)

4. Compared to other investment products such as bank FDs, post-office schemes, debt MFs, etc. the returns offered by an annuity plan may usually be 1-2% lower.

5. Moreover, this return from an annuity plan is taxable; whereas there may be more tax-efficient options available from time from time. If you are locked in an annuity plan, you will perforce have to keep paying more tax.

Given that an annuity plan will typically run for 20-25 years (assuming you retire at 60 and live upto 80-85), it makes no sense to lose control over your money. Why earn lower returns? Why pay more taxes? Why have no flexibility? A little bit of financial knowledge will (a) not only help you manage your money more efficiently than an annuity but (b) also ensure that your savings outlive you and you leave a sizeable legacy for your children.

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