How safe are annuities?

10th April 2012

If you are considering a retirement investment where you are likely to invest your hard earned cash, then chances are you are looking for something which will provide you with a relatively safe and secure return for your investment. Annuities are a popular choice for many people who are looking to turn their savings into a reliable source of retirement income and as many are backed by large insurance corporations with hefty financial backing, making them an option that many people consider “safe” when it comes to retirement investment.

What makes an annuity safe?

In general gilts and corporate bonds are two of the main investments behind your annuity and as such they can often be regarded as a lower risk. Annuities are also covered by the Financial Services Compensation Scheme (FSCS) which means that you are eligible for unlimited compensation up to 90% of a claim. This helps to reassure many annuities investors of the security of their finances.

Annuities which are low-risk or minimal-risk investments are designed to be seen as a secure retirement investment and unless an insurance company was to go bust or to go into liquidation then standard annuities investments pose little risk for the average investor.

What risks can annuities present?

As with any type of investment, annuities do carry with them a level of risk and in many cases this risk depends on the type of company that you have chosen to invest with. Many annuities are backed by large insurance companies so the security of your annuity can very much depend on the financial stability of any given insurance company.

The security of your annuity also very much depends on what type of annuity you choose to invest it. If you invest in a guaranteed annuity then you may yield a lower return in general, but your income level will be fixed and guaranteed. If you invest in an investment backed annuity then you could find yourself with a higher return, but you could also find yourself with a lower return if the market takes a downturn.

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