How The Split Annuity Can Combine The Benefits Of Immediate And Deferred Products
A split annuity can help you to combine the benefits of different annuity products, and to reduce the risk involved to the lowest possible level. It is important to understand right at the start that annuities are designed to be the most secure of financial instruments, and that they are not meant to be high gain speculative vehicles. You need to take some time to decide whether investing in annuities as a whole is right for you, before you can decide whether or not to split the annuity.
Annuities are becoming increasingly popular, largely due to the fact that they can replace the pensions and other financial instruments which are becoming ever less reliable. As the average age of the population increases, so the burden on pension funds becomes ever greater. Combine this with the fact that inflation continues to erode the value of saved money, and you can easily see why the fixed annuity has become such a popular option. Before you rush in, though, there are several important facts you need to consider.
A split annuity will combine the strength and solidity of a single premium deferred annuity, which will grow with time in a very tax efficient manner, and a single premium immediate annuity, which begins paying you a monthly income straight away. The vast majority of investments are taxed on an annual basis. Everything which the investment has earned in a particular tax year will become liable for taxation at the end of that year. Annuities confer the great benefit of being able to defer taxation until the money is taken out again during retirement.
The idea behind this combination of investments is that the immediate annuity provides this income right from the start of the investment program, while the standard deferred annuity replaces it and keeps the principal intact. Obviously, this is an over-simplification, and nothing is quite this simple in practice. There is a continual need to reevaluate interest rates to make sure everything is working as it should. It is also important to remember that inflation will still erode the spending power of any money you are able to withdraw using this system.
One of the most effective ways of using a split annuity is in providing the income to meet mortgage payments. This is because mortgage payments are relatively easy to calculate into the future, and are less subject to wild fluctuation than many other prices. The annuity can be used to pay the mortgage over time, while the equity continues to build in the property as the years go by. Done properly, this split annuity investment can result in a retiree having their home bought and paid for, and also a fixed monthly income as well. There are many advantages to this use of the split annuity.
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