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Thursday, February 13, 2014

The pros and cons of cashing in your annuity for a lump sum payment

Retirement objectives are facilitated with annuity payments
Lump sum annuity payments create opportunity
In these tough financial times, it seems as if debt builds up while the potential for income dramatically decreases. 

For those receiving an annuity, that income is stabilized but limited to the amount of money that is available. The annuity can run dry on its own leaving the recipient without income while the debt remains. 

There's also the situation where an emergency arrives and the money that is in the annuity could be used to pay rather large sums of money owed as a result of the emergency. 

Then there's possibility that the opportunity for a greater investment might require the assets from the annuity to be paid in full. There are both ups and downs to cashing in on your and annuity and there are financial companies available to help make this happen.

Immediate payment

Every person has a bucket list of things that they could do with a substantial sum of money. They dream of that huge inheritance from a distant relative or anticipate the winning of the lottery. When that money arrives, there is likely a list of things that they are going to do with that money. This is far from uncommon but shouldn't be a reason to cash in on an annuity. The immediate payment of an annuity comes with its own set of responsibilities and consequences.

Loss of income

Annuities are set up to provide a steady income over a period of time. This is incredibly convenient for retirement. Having an annuity is also helpful should unemployment or disability hit. This stable income provides monthly security and allows the person to sustain their lifestyle. By cashing in on an annuity, that stable income is no longer and lifestyle changes will have to occur.

Pay off bills

Bills can stack up. This is just part of life in this economy. Cashing in on an annuity may allow for the liquidation of those bills but that money won't certainly differ more bills from coming down the pike. Before cashing in on an annuity, personal finances should be examined. Living within the means of the income is a way to stabilize. This may mean cutting costs in some areas to catch up on bills in other areas.

Primary or secondary

With the evaluation of the personal finances should come the evaluation of personal income. If an annuity is being paid monthly and there is substantial amount of income coming in from another cash flow, then the annuity income could be considered secondary. Retreating that annuity could provide a lump sum for a medical bill or big ticket purchase, such as a home. It's important, however, to understand that the annuity will no longer be part of the steady income and adjusting finances to suit these needs is imperative.


Any income from an annuity is taxable income. By cashing in on the lump sum of an annuity, this is also considered income and will be taxed. The amount of the total lump sum could equate to a greater amount of taxes being paid out. This is likely going to be higher than the regular rate of taxes paid while receiving payments.

Fees for cashing an annuity

Most annuities are designed to support a steady flow of income for the beneficiary when other means of income are not feasible. This is established by the contract of the annuity. Fees and provisions will likely be assessed and absorbed by the annuity once liquidated. These costs can differentiate between financial institution and types of annuity. Some annuities will only pay out up to the principle amount of the annuity and a forfeiture of any interest will be assessed. This is usually on top of any fees.

Cashing in on a lump sum of an annuity can be beneficial but there are also risks involved. Before considering a buy out of the annuity, a review of personal finances should be done. Cashing in on an annuity should not be done as a means to simply hit the jackpot on a good deal of money up front. In any case, seeking professional financial advice should surely be considered prior to cashing in on an annuity.