What is a variable annuity? As in the case of any annuity scheme, a variable annuity is a contract between you and insurance company to make periodic payment to you starting from a predetermined date. This date can be immediately after making the first payment. One major feature of variable annuity is that you hold the investment option within a range of options offered. The normal options offered are mutual funds. They invest in stocks, bonds, government securities and other money market instruments. The value of your variable annuity depends on the performance of the funds in which you have invested.
Common features of annuity products The most common feature of all annuity products is that the investor or the investor and spouse will get a periodic income until death. The payments to the investor may start immediately or from a date mutually agreed by the company and the party. The periodic payment can be fixed or of an increasing nature. The payment can be stopped after a fixed period or can continue until death. There is no tax on the payments made by the investor. This applies to the capital gains also.
How do you qualify for variable annuity? Anyone can purchase a variable annuity contract. The payment also can be made in one lump sum or in fixed periodic installments. One thing you must bear in mind is that a variable annuity scheme is not good as a short time investment. When you withdraw the money it will attract tax. The charges levied by the insurance company are also considerable making it not attractive for short term investment. Variable annuity is a good investment as a long term one to ensure continued income in retirement.
The appreciation of your investment in a variable annuity depends upon the purchases you make with your money. You are the one who makes the decision on where the money is invested. Part of your money can be invested in a deposit account which brings in a low, fixed rate. Another part can be invested in stocks. The performance of these stocks affects the value of your investment. When the stock value goes up you make a gain. But, if the stock value goes down your loss also will be considerable.
Social security and taxation Payments made to purchase variable annuity is tax deferred. So you get a tax emption to purchase annuity. There is no tax on the appreciation your investment. The tax becomes due only when you start getting payments from the insurance company. That is also due only on the amounts you receive from the company. If you are eligible for variable annuity receipts you can retire earlier than the permitted age of 65. When you retire at the age of 62 you may get a lower social security payment. But, the income from the variable annuity makes up more than the reduction in social security payment.
In a variable annuity scheme, if you select the investments wisely you can make your retirement more enjoyable. It also allows you to retire early.