Annuities can be broadly be categorized as fixed or variable annuities, and when we categorize, we usually do so based on the interest rate that is specified. When the rate is said to be fluctuating it is referred to as a variable annuity and when it is said to be fixed rate it is referred to as fixed annuity.

There are other groups of annuities, but for the sake of this article we will confine ourselves to the two categories that are fairly easy to understand; we will also make an assumption that a fixed variable annuity will not at a later date change to a variable annuity and vice-versa we will briefly look at the advantages and disadvantages of the two.

Advantages of fixed annuity
The prime advantage is that it is very clear in its terms in the sense that the interest rate is pre-determined and constant throughout the period of annuity. In a situation where the economy of a country is not fairing well and the market performance indicators, such as the stock exchange indices, all seem to point to a gloomy situation you will find the rates of return are very low at times even zero or negative. This is when the fixed interest rate is higher than the rate of return, making it a profitable venture.

Fixed annuity is said to be a worth while investment that is not very involving, unlike the variable annuity where one may have to keep track of the market performance. The fixed annuity makes things very easy and predictable and does not leave much room for maneuvering. The only thing that you may need to make adjustments for is inflation.

The other advantage which also applies to the variable annuities is the tax-exemption clause. All payments, especially to pension funds are tax exempted, thus one would make a lot of savings on taxes when they contribute to pension funds. This has at times been abused by the rich in a bid to avoid paying tax.

Disadvantages of fixed annuities
Fixed annuity would usually cover a long period of time, at times even 100 years! When an economy is performing well, and the rate of return which is influenced by the market performance indicators, such as the stock exchange index, then they are also fairing well. The fixed annuity may be much lower than the rate of return.

There is always the anxiety of the unexpected when one is faced with investment decisions because with fixed annuity, everything is spelt out in advance. It makes the investments very dull and boring, you cannot wake up one day hoping to make a kill.

Fixed annuities are very limited in their scope as an investment opportunity, this is because the funds that one has invested in are held up for many years, and the thought of withdrawing the funds is a far-fetched-wish because if you want to withdraw your accumulated investment over the years, before your retirement age, the charges that you will incur are punitive and the government will ensure that they reverse the tax benefits that you have enjoyed over the years.

Insurance firms around the world have at times not lived to their expectation. There are few cases around the world, where insurance firms, after collecting dues from their clients, due to mismanagements have been unable to fulfill their financial obligations leaving their clients completely stranded as much as insurance firms are closely regulated by government legislations. The chance of things going wrong with insurance firms is extremely slim compared to other investment portfolios, but it is there. The pension funds that were unable to meet their obligations have left many pensioners completely stranded and the government had to step in and rescue the situation. Thanks to the politicians who are keen on listening to pensioners who are the most active voters.

Variable annuities are at times said to be very profitable because insurance firms would set the interest rates higher than the expected rate of return in order to wow customers. These rates are at times very attractive and one can make a kill out of them.

Conclusion
For those of us that have worked in elderly care homes and lived with elderly people, we have come to observe that many of them struggle with financial issues. It is important that the government sensitizes people on the need to save for their pensions. Many people start to plan for their pensions when it is very late. If we were to assume that the average life expectancy is 80 and retirement age is sixty years, which is still far below some western countries official retirement age, this would essentially mean that one needs to store money for twenty years plus, given that the contributions towards pension are usually less than ten percent of one’s income, this would obviously mean that if your start saving at fifty years, you definitely are very late unless you put in a lot of money or a lump sum.