Many people wonder “what is an annuity?” and “how do annuities work?”. Annuity payments are part of a long-term investment strategy issued by an insurance company to prevent you from outliving your income. These periodic payments can last for years or for the rest of your life. With flexible annuity payments, you can invest over time, receive payments now or defer them to a later date, and choose a rate of return that is fixed, variable, or indexed.

Pros and Cons of Annuities

There are many pros and cons of annuities to consider before making decisions about your finances. There’s a certain degree of risk involved in investing your money, but inflation can erode the value of your pension income. There are also tax advantages to having an annuity; however, you may have to pay taxes on a lump sum that you receive.

Inflation

If you are retiring fairly young, you may want to consider the partial lump sum because of inflation. For example, if prices rise by even three percent per year due to inflation, that means that a $2,000 monthly payment today could be worth only $1,000 in twenty years.

Investing Your Money

If you are a particularly savvy investor, it may be in your best interest to invest the money yourself. However, if you are the type of person who is more likely to spend the money if it’s available to you, perhaps leaving it in the annuity and receiving higher monthly pension payments is a better option.

Making a Choice That’s Right for You

Ultimately, the decision of whether to choose a partial lump sum or higher monthly pension payments is a personal one that depends upon what other sources of income you have coming in and how much you have saved over the years.

Lump Sum or Annuity: Ready to Discuss the Best Option for You?

Whether you have a lump sum or annuity, it’s a wise idea to consult an expert to understand your options and ensure that you are living life to the fullest, yet still living within your means.  To discuss how annuities would work for you, contact Novation’s experts! *Novation is not a financial advisor or consultant and strongly recommends that you speak to a lawyer or accountant before making any significant financial decisions.