What Is Annuity Fund?
Saving for retirement can be a daunting task as the cost of living continues to rise with each passing year. An annuity fund is one of the many available investment options designed to save and make money over a certain period of time. And while the amount of money made can be substantial, annuities have certain features that may or may not work depending on a person's individual circumstances.
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Identification
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An annuity fund is an insurance product designed to provide a consistent stream of income over a designated period of time, according to CNN Money. This consistent stream of income, or payments, makes annuities a popular choice when saving for retirement. Investors can also opt to receive a lump-sum cash payment in the place of periodic payments. Individuals who are able to invest a sum of money on a long-term basis can benefit once it's reached a certain state of maturity.
Function
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Insurance companies invest the monies received through annuity accounts into other investment options, according to CNN Money. When a company's investments do well, account holders can reap the benefits in the form of dividends. In effect, annuities are designed to earn interest, which is how insurance companies are able to guarantee future payments. Payment amounts can vary depending on the initial investment amount, the length of the payout period and the type of annuity fund selected.
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Types
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An annuity fund can be set up to pay out at a future date, or shortly after the account is opened. Deferred annuities pay out after a designated period of time, which can run from 10 to 50 years from the initial investment. An immediate annuity pays out shortly after the account is opened. According to CNN Money, the difference between the two is that money accumulates under a deferred account, whereas money is paid out as soon as it's made under an immediate account. In terms of payment amounts, annuities can be set up to pay a fixed amount for each payment or a variable amount. The amount of a variable payment depends on how well the insurance company's investments perform.
Fees
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As with most every insurance product, administrative and commission fees apply in varying amounts depending on the type of annuity fund account, according to CNN Money. Commission fees go the agent or broker who sold the annuity. These can run as high as 10 percent. If the money invested in an annuity is withdrawn early, surrender charges can run from 7 to 20 percent depending on the terms of the account. Annuities that carry a variable payout rate may also be subject to annual administrative and management fees.
Taxes
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As a retirement savings option, the tax-deferred status on annuities enables account holders to create profit without being taxed on earned monies, according to CNN Money. Annuities are typically set up with no limits on contribution amounts so any amount of money can grow tax-free. In addition, any interest earned is compounded on a yearly basis with most annuity contracts. Taxation becomes a problem only when an annuity is cashed out prior to turning 59 and 1/2 years old. When this happens, an automatic 10 percent withdrawal penalty is charged. Also, any partial withdrawals made prior to this time is taxed as ordinary income.
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