Annuities are considerably sound investments that guarantee steady streams of income. The joy of such an investment is that you are assured that at a certain period of time you are likely to receive some cash inflow, especially if the investment is certain and not contingent on anything. All money market investments come with a certain degree of risk and the longer the investment period, the higher the risk the investor has to bear. The risks of investing in annuities are certainly present, never be cheated otherwise.
All investments whether capital or debt instruments have a level of risk. Even the government bonds that are branded risk less also have a degree of risk to them. Most pension plans are usually annuity investments that give the retirees guaranteed income after retirement. Buying annuity securities should not be taken lightly because the risks of investing in annuities are real. These risks include:
Long term annuity securities that offer fixed income only are prone to inflation risk. It is a well known fact that prices of normal household goods tend to rise year after year. Therefore if the annuities are not adjusted for inflation costs, the holder of the annuity will find it hard to meet the obligations they would easily handle previously.
INTEREST RATE RISK
Annuity securities are subject to the prevailing interest rates therefore the value of the income received periodically may vary from time to time unless it was agreed initially that the annuity would offer constant payments throughout the entire life of the contract. Retirees, who depend on the sole income their pension offers, suffer tremendously when short term interest fluctuates and their source of livelihood becomes compromised.
Contingent annuities, commonly issued by insurance companies, are paid only if the holder of the security is alive. In the event the holder of the security dies, the holder of the insurance contract is under no obligation to continue making payments to the family of the bereaved. The surviving family therefore runs the risk of losing their daily livelihood.
Withdrawal from an annuity contract prior to the maturity period usually attracts some surrender charge. This means that if you invest in annuities you need to be patient and wait till maturity. This property essentially means annuities are not ideal for emergency sources of income. Annuities are really reliable investment instruments but before making your bid do thorough research and find out if the risks are bearable.