Annuity products can make for a type of retirement investment that’s paid into over a period of time. Flexible premium annuities allow investors to contribute as little or as much as they want within limits without committing to a schedule of payments. And while flexible premium annuities may provide convenient payment options, this flexibility can bring about certain negative effects in terms of costs and overall return on investment.
Annuity products are structured in different ways in terms of premium schedules, how earnings are paid out and when earnings are paid out. Flexible premium annuities differ from fixed or scheduled premium annuities in terms of how often a person has to pay into them. Fixed premium types must be paid according to a set schedule, be it monthly, quarterly or yearly. In effect, any monies paid earn interest income, which is added to the total investment amount. Investors can opt to receive payouts immediately or defer payouts for a later time. The option to defer payments until retirement age allows invested monies to accumulate over time.
The flexible payment schedule that comes with flexible premium annuities means they almost always come with a deferred payout option. So, a person can invest small amounts of money on a frequent basis over a period of time and not expect to see any returns until years down the road. Most companies that sell annuity products also set minimum and maximum limits on the premium amounts paid, with minimums as low as $50 a year. The maximum limit set by a company ultimately determines an annuity’s earnings potential, which actually becomes a negative in cases where someone wants to make the most of her investment.
The built-in flexibility features offered by flexible premium annuities require more administrative maintenance than fixed-premium annuities. As a result, companies charge higher fees for maintaining flexible premium types since investors can basically make premium payments whenever it's convenient. Also known as load fee charges, the costs involved with maintaining a flexible premium annuity can ultimately reduce the overall expected earnings percentage on an annuity investment. Additional fees become an issue in cases where someone ends up withdrawing money from an annuity account before it matures. Companies typically charge what’s called a surrender fee that runs anywhere from 5 to 25 percent of the withdrawal amount.
Flexible premium annuities offer some tax-deferred benefits during the time money sits in an account, but they’re eventually subjected to taxation once an annuity matures and starts to pay out. Part of the payout amount consists of premium monies paid into the account. The remainder comes from accrued interest earnings. Investors pay taxes on the interest earnings amount whenever a payout is made, be it monthly or in a lump sum amount. Federal taxes become an issue in cases where a person opts to withdraw monies from a flexible premium annuity before it matures, or before he reaches 59 1/2 years old. Early withdrawals result in a 10 percent tax penalty fee in addition to the normal income tax rate a person pays.