Annuity payments are one of many things in the financial world that can confuse the average person. Some of you may be receiving these payments without totally realizing it, while others might not understand what they are, how they work, or why someone would receive them.
Annuity Payments Explained
Legally speaking, an annuity is any financial product that provides a set number of future cash payments, rather than you receiving all the money in one go. The most common example of an annuity payment is a pension: you invest in a retirement plan while you’re working and receive monthly, quarterly, or annual payments from your pension when you retire.
You may also receive annuities when:
- You cash in on a life insurance policy
- You win the lottery or a sweepstake and choose to get the money in installments
- You win a lawsuit and get a structured settlement
When you look at it like that, annuity payments seem like a positive financial product that will help you reach your personal finance goals – but is that truly the case? It could be argued that the opposite is true: annuity payments end up holding you back from achieving some of your biggest money goals in life.
Why might that be the case, and what could you do to prevent it?
Gradual Payments Limit Your Spending Power
As useful as regular payments from an annuity are, they do limit your spending power, which directly affects the financial decisions you wish to make. Many retirees don’t mind receiving annuity payments because they tend to be in a strong financial position anyway. It’s hard for someone to reach retirement age without holding onto lots of additional investment assets — like a house that’s probably tripled in value since they bought it and is now worth a fortune.
That being said, if you receive annuity payments for something else — or you lack the power of existing financial assets — then there’s not a lot you can do with monthly, quarterly, or annual payments. Yes, they will help you pay for monthly bills and stuff like that, but what about the serious financial investments that help you achieve more financial stability?
Managing Annuities Strategically
Let’s say someone has $90,000 tied up in investment annuities, either for retirement or for other financial purposes. You’re due to get that $90,000 in monthly payments at some point, but what if you could have it right now? Having access to $90,000 now puts you in a strong financial position to make smarter decisions that benefit you in the future. For example, you can easily use that money to make a large down payment on a new home, helping you get your foot on the property ladder.
You’ve now bought a lovely house in your younger years, and you can hold on to it, make improvements, and sell it when you retire. The value of your property will exceed the value of your annuity payments at that point, so you technically end up with more money than if you simply left things as they were and accepted the annuity payments.
The point is that it’s always better to have access to a large sum of money than to get it gradually. With the right guidance from a professional financial advisor or investment broker, you can turn a lump sum of cash into investments that set you up for a brighter future.
Removing Yourself From A Debt Spiral
The other argument for annuity payments holding you back is that they don’t really help you get out of any debt spirals. When you owe money, you can wipe out a huge portion of your debts – or all of them in one go – if you had access to your annuity payments right now. Waiting until you get them monthly won’t do anything, and your debt will likely have gone up by then anyway.
Instead, if you could use your annuity payments right now, then you’d stop the debt spiral and find yourself in a much safer financial position.
How To Get More Out Of Annuity Payments
The solution is less complex than you think and involves selling your annuity payments to a third-party company. As Annuity Freedom explains, you can sell all of your annuity payments, some of your payments, or even a part of some payments, in exchange for a lump sum.
What happens here is the third-party company gives you money to use right now, but they will receive your future annuity payments. Keep in mind that you’ll usually receive a cash offer that’s slightly less than the value of your annuity payments, but that’s how these companies make money. In reality, with some smart investing, you can still turn that lump sum into an even greater investment.
It’s a simple concept that lets you use money you’re already due to get, only you can now use a lot of it in one go. Moreover, if you choose to sell some of your annuity payments, then you agree on a timeframe – say, you sell years 1 through 6 – and your annuity payments beyond that timeframe happen again as normal, which gives you a nice balance between the two.
Understand The Pros & Cons Of Annuity Payments
Based on the information you’ve just read, are annuity payments bad for everyone in every situation? No. If you’re already well-set financially and have lots of assets or investments in the pipeline, then you may prefer to get monthly payments anyway, particularly when you retire.
On the other hand, annuity payments will hold back people who don’t have much working capital or who would benefit from accessing a lump sum to make more investments right now.
Whichever way you look at it, annuity payments are something everyone should consider more when it comes to securing their financial future. Weigh up the pros and cons for you, then decide whether to accept your annuity payments or cash them in.
Image credit: Photo by Tima Miroshnichenko; Pexels
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