A Primer on Annuities

We often get the questions: “What is an annuity?” and “Are annuities an appropriate investment for my portfolio?” So, let’s dig a little deeper.

An annuity is an investment option that provides a series of future payments in exchange for present-day deposits. Annuities can be a good source of income during retirement, and can be customized, with variations in interest rates, premiums, taxes, and payouts.

When you sign an annuity contract, you’ll contribute money, either in a large lump sum or as smaller monthly payments, called premiums. Your contributions are made during a period called the accumulation phase. Once invested, your money grows on a tax-deferred basis.

When it comes time to withdraw your funds, you may owe taxes on either the full withdrawal amount or any interest accrued, depending on the type of annuity you have. During this time, called the distribution phase, the annuity company distributes payments to you.

What are the different types of annuities?

1. Fixed annuities: A fixed annuity offers a guaranteed minimum payout and interest rate, and you are not influenced by fluctuations in the stock market. As a result, fixed annuities are considered one of the most reliable annuity options. You might receive your payments for a set period of years or as a lump sum.
2. Variable annuities: Variable annuities feature an interest rate that changes in response to stock market fluctuations. You choose where your contributions are invested — you’ll typically have low-, moderate-, and high-risk options. You’ll receive smaller payouts if your investment performs poorly and larger payouts if it performs well.
3. Indexed annuities: Indexed annuities aim to split the difference between fixed and variable options. With these annuities, your contributions are linked to the returns of one or more market indexes. Many indexed annuities also come with a guaranteed minimum payout, like a fixed annuity.
4. Immediate annuities: Immediate annuities allow you to begin receiving payouts no later than one year after you contribute your premium. This type of annuity is almost exclusively single-premium, meaning it is funded by a large, one-time contribution.
5. Deferred annuities: If you have a deferred annuity, you’ll wait for a certain amount of time before you begin receiving your income stream. This is known as the accumulation period, during which your money grows, and you do not pay taxes on your funds. Depending on your contract, you can contribute to the annuity with a single premium or with a series of payments. We work with clients to help determine if an annuity is appropriate for them, and if so, which annuity works best for their unique situation and is in line with their financial goals. We consider how long you have before retirement, how quickly you’ll need to access your money, and how much tolerance you have for risk, among other things.

This article is being provided for informational purposes only and is not a complete description, nor is it a recommendation. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected, including diversification and asset allocation. Cygnus Asset Management, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Securities offered through Raymond James Financial Services, Inc., Member FINRA / SIPC.

These policies have exclusions and/or limitations. The cost and availability of annuities depend on factors such as age, health, and the type and amount of annuity purchased. As with most financial decisions, there are expenses associated with the purchase of an annuity. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Guarantees are based on the claims-paying ability of the annuity company.