Finance

Pension annuity calculation explained

Pension annuities require a series of fixed payments from you over a period of years so that you have a reliable income during retirement. The payment frequencies are monthly, quarterly, semi-annual and annual. As an investor, if you are contemplating the use of annuities to generate income, there are a wide variety of them available in the market, it is advised you seek the help of a finance professional before making the purchase decision or at least review the options before zeroing it down.

To accurately estimate your future income and to do away with any confusion, here are some smart tips:

  • Understand how your annuity works by determining what type it is. A good pension annuity calculator takes into account your financial and other considerations and provides you with the income figure in your retirement.
  • While calculating, use future value if annuity will not pay out for several years.
  • Determine the interest rate of your annuity. Some calculators provide a guaranteed minimum interest rate, i.e., the interest rate will not fall beneath this rate.
  • Periodically enquire the current balance of your principal to calculate your payment appropriately.
  • Usually, the full amount of your annuity is paid out over a specified period and the balance paid to your beneficiary upon your death. Other options pay the beneficiary for the duration of their life beyond your own.
  • Annuities provide a tax shield that allows funds to accumulate in a favorable environment.
  • Upon retirement, when you start receiving funds from a qualified pension plan, you may have to pay federal and state income taxes.
  • When deciding the frequency of payout (monthly annuity or lump sum), be aware that some annuities usually pay out a fixed rate and this may or may not include inflation protection. As the future cost of living is unpredictable, many retirees prefer to take their money in a lump sum.
  • Choosing to take it as a lump sum means the entire amount is immediately taxed unless you put it in an IRA or other tax sheltered account.