Immediate annuities: Do-it-yourself pensions
By Jenny C. McCune • Bankrate.com

Pensions may be going the way of rotary phones, but retirees looking for a substitute may want to investigate immediate annuities. These insurance products are expected to grow in popularity as the number of traditional pensions declines and baby boomers scramble for guaranteed sources of income, according to James Lange, author of "Retire Secure!"

Purchasing an immediate annuity is like buying a monthly pension check. You pay an annuity provider a lump sum in exchange for a guaranteed income stream. The monthly payments start immediately -- usually within 30 days of handing over your money.

Immediate annuities shouldn't be confused with deferred annuities. A deferred annuity is a retirement savings vehicle in which you sock away money on a tax-deferred basis just as you would with a traditional IRA. When you reach retirement, you can withdraw it as a lump sum or as a series of payments. The money is taxed at the time of withdrawal.

By contrast, an immediate annuity is a way to convert at least a portion of your retirement funds into a steady income that lasts as long as you do.

Characteristics of immediate annuities:

• One steady payment for life. "It takes away the anxiety that you may live longer than your money," says Steven Weisbart, an economist with the Insurance Information Institute of New York City, a nonprofit association financed by the insurance industry. • They're simple. The company that provides the annuity handles the investment responsibilities. • They're low-risk. That's assuming the provider is financially secure. The funds are guaranteed by the assets of the insurer and aren't subject to the vagaries of financial markets. • They're tax-efficient. If you use tax-deferred vehicles to fund them, you only pay taxes on the checks you receive rather than on the entire lump sum.

So-called "qualified" immediate annuities are those that are funded by tax-sheltered accounts. That can include a distribution from a company retirement plan, an IRA or other tax-deferred retirement funds, such as a simplified employee pension IRA, or SEP-IRA. You can also transfer money from a deferred annuity into an immediate annuity. Payouts from a qualified immediate annuity are subject to taxes, of course.

However, if you are financing your immediate annuity with funds that have already been taxed, the amount of principal paid out each month is not taxable since that's considered a return of capital. In such cases, the annuity provider will indicate the amount of the monthly payout that would be excludable from taxes, generally at the time you receive a quotation.

Are annuities always appropriate?
Source: Bankrate.com
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Annuity drawbacks
The biggest drawback of an immediate annuity is that the benefit normally dies with you.

"If you buy an annuity and then you get hit by a bus the following Tuesday, all that money is gone," says Michael E. Kitces, a Certified Financial Planner and director of financial planning for the Pinnacle Advisory Group in Columbia, Md.