Question: If I buy an annuity that pays out a fixed monthly sum over a lifetime (say 30 years or longer), will I lose out if interest rate and inflation increases in the future?
If you buy an annuity that pays a fixed monthly sum, the interest rate and payout is locked in for all the future years.
If interest rate falls, you continue to get the fixed monthly sum and is not affected by the lower interest rate. If interest rate incrases, you will not enjoy the higher interest rate.
Question: Should I take the risk of locking in the payout for all the future years?
In my personal view, it is better to buy a participating. It guarantees a lower payout and distributes a bonus that depends on the yield earned in the future. The bonus is not guaranteed and can be nil in some years. It is likely to vary between 0 to 4% yearly.
The payout under this annuity is low in the initial years, but will increase in subsequent years with the bonus.
If you buy this type of participating annuity, it is important that you choose an insurance company that distributes a large part of the investment gain to the annuitants, and not one that tries to maximise profits for their shareholders.
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