Choosing A Lump Sum Annuity vs. Accepting Regular Payments
A lump sum annuity payment may be offered in a number of situations, and it is obvious that it will be appealing to take it.
Everyone has continuing obligations which must be met, and everyone has something for which they could use cash for immediately. You must, though, have the capacity to think about these immediate requirements in the context of your overall situation, and your potential requirements for income in the future.
It's also important to take into account your own personal capability to handle money. If you've been one who has always had more days in the week than you had money it's a sure bet that you'll burn through that lump sum annuity payment faster than you could have ever imagined. What are you going to do then?
There are many cases where you will be presented with the choice of either receiving a lump sum annuity or a series of payments over time. Many large competition and lottery winners are given money in this way.
If you have won a court case for injury compensation you will usually receive money over time, but there may be an option to apply to the court to receive all of the money at once. There is little point in doing this unless you have a specific reason for doing so, as it can have negative tax implications.
There are cases where a lump sum annuity will be of great benefit to the award winner. Maybe you are skilled at a certain line of business, but lack the capital to get started. An early release of the money which is due to you would be the obvious solution, as it would allow you to get started in business without needing to prepare business proposals and attempt to borrow money. If the business begins making a profit quickly, you could have the income which you would have received from the annuity payout over time as well as the capital investment in the business.
There is also the consideration of real estate. If you are awarded money over time instead of a lump sum annuity, you will be able to pay your rent but you will not be able to build up an asset using property. It may be possible to persuade a mortgage lender to lend you money based on the guaranteed payments you have, or you could find a company that would be willing to provide you with a settlement loan, but you will still have more freedom with a lump sum. You can choose a property to buy which will suit your needs, and you can even split the money between your residence and income property.
The one consideration which may make you decide to stick with the regular payments is taxation. If you change the terms of a court order so that the money is no longer paid as part of it, you could find yourself in a situation where you are paying more tax. Make sure you consult a competent tax professional before you make a final choice, and make sure you get your annuities explained to you. Although the amount involved may be small, with compound interest they can grow large over time. Plan your future carefully before you decide on a lump sum annuity.
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