Financial independence is a must if one is to live a comfortable retired life. And only sound and proper investments can guarantee financial independence. When one talks about sound and proper investments, financial plan acquires importance.

While charting out a financial plan, especially retirement plans; one must take into account the risk factors associated with various financial instruments. Investing heavily in stocks is usually not recommended as stock markets are quite volatile in nature and your capital faces the risk of depreciation. Hence, most financial planners generally recommend retirement annuities.

So, what is a retirement annuity? The Oxford dictionary defines annuity as ‘a fixed yearly allowance, especially one provided by a form of investment.’ Retirement annuity is a plan wherein a person enters into a contract with an insurance company and pays premium/premiums. There are two phases of retirement annuities. The first phase is known as the accumulation phase wherein the annuitant makes contribution. The second phase is termed as payout phase wherein the annuitant starts receiving regular payments. This payment continues for a lifetime; however, if the annuitant has selected an age, then he will continue to receive the payment until he attains that age.

Retirement annuity is another form of deferred annuity. This is because the annuitant starts receiving the payment, only after his retirement, i.e. few years after the initial investment.

Retirement annuity, allows the annuitant to receive the payment on a monthly or yearly basis. One must take into account your future needs and expenses before making a choice between a monthly or yearly option. The option chosen by you also depends upon the amount that you will be receiving from your investment.

Retirement annuities can be fixed or variable. Fixed retirement annuity allows the annuitants to receive a predetermined amount of money. The payment, received under a fixed retirement annuity, depends upon the amount invested as well as the interest rates prevailing at the time of signing the contract. In case of a variable retirement annuity, the returns are solely dependent on the prevailing interest rates; hence, they tend to follow the fluctuations witnessed in the interest rates.

The main advantage of a retirement annuity plan is that, unlike other investment tools, the capital remains safe as long as the insurance company remains solvent. For instance, if you invest in stocks, you run the risk of losing your capital if the company becomes bankrupt. This is not so in the case of a retirement annuity.

Investing in retirement annuities also helps you to take advantage of tax benefits. Investment options like CDs are taxed on a yearly basis. However, tax is deferred on retirement annuities. Hence, gains made by your retirement annuity policy are not taxable on a yearly basis. Annuities attract tax once the annuitant starts receiving payments, i.e. after the annuitant is retired. However, retirement will automatically put you in a lower tax bracket thus, lowering the tax rate. Also gains made from retirement annuities are considered as ordinary income.

Retirement annuities are beneficial for those who are looking forward to spend a comfortable life long after they retire.