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Immediate annuity: calculator, comparison and alternative

With an immediate annuity, a large one-off sum is paid in to draw a lifelong pension. It is a form of private pension provision that many people use to top up their statutory pension. Providers of immediate annuities are usually insurance companies. The amount of the pension to be paid out depends on the amount paid in and how high the insurance provider estimates your life expectancy to be.

Fortunately, this cannot really be predicted, but as we all know, there are statistics and calculations for everything. In practice, this means that you pay a medium to large amount to the provider, which is then paid out to you in monthly installments.

Instant pension calculator

On the websites of the various providers of immediate annuities (including HUK, Allianz, cosmosdirekt) you will find calculation tools for immediate annuities. However, as nice as the security of these guaranteed payments may be, they have major disadvantages that are not mentioned in the calculator from HUK and Co. Inflation, for example, can wipe out your immediate annuity, which remains the same even if inflation rises.

Another disadvantage is the high cost of an immediate annuity. Of course, companies like Allianz want to earn something from their customers. However, with such serious disadvantages, it is worth looking at alternatives that are more profitable, cost less and are adjusted for inflation.

This applies to rented investment properties. Investors receive a rental income every month. No costs are deducted from this rental income that are transferred to any group. The rent is also adjusted to the inflation rate in the long term. Let’s take another look at the question of for whom an immediate annuity or alternative options such as a property as an investment are worthwhile:

  • On the one hand, an immediate annuity is worthwhile for people who have a high life expectancy, i.e. who are likely to live a long time because they are in good health.
  • On the other hand, people can think about taking out an immediate annuity if they assume that their statutory pension will not be enough to cover their living costs.
  • An immediate annuity can also make sense if you have sufficient capital but prefer to live on monthly payments so that you can “dose” the money a little better.
An immediate annuity is not suitable for everyone

An immediate annuity is not suitable for everyone

The problem with an immediate annuity, however, is that you first need to have a large amount of money to invest for later. In Germany, this is not necessarily the case for the typical average earner. The situation is different with an investment property: a few thousand euros is usually enough to generate long-term rental income.

In order to take out an immediate annuity that offers security for retirement, a relatively large amount must be available, such as an inheritance or a large bonus payment from the employer. So if you are in the fortunate position of having a large sum of money at your disposal, you can consider an immediate annuity.

An immediate annuity is the opposite of traditional installment saving. With installment savings, a smaller amount is paid in each month in order to receive a large sum of money at the end of the term. An immediate annuity works in exactly the opposite way: a larger sum is paid in at the beginning and then a monthly return is received. This return is paid out until the end of your life. Incidentally, the mechanism is similar for a property that is rented out.

Immediate annuity comparison

There are many providers of immediate annuities. A thorough comparison can make a big financial difference, which is why you should allow sufficient time for research and make a detailed instant annuity comparison. The most important points to consider when making a comparison are:

  • Should it be a dynamic or a constant payout? With a dynamic payout, the initial pension payments are somewhat lower than with a constant payout, but the payments increase over time. In this context, there is often talk of surplus participation. Whether the pension payments increase over time or not depends in principle on how profitably the insurer invests the money.
  • Is it just about you or also about your dependants? If you want to protect your surviving dependants, you can choose a longer contract term so that the pension is paid even after your death.
  • How long should the term be? The longer the term, the lower the monthly payments will usually be and the more likely it is, unfortunately, that you will not live to see your last pension payments.
  • Can you withdraw capital again in an emergency if you need it earlier than planned, or is the money untouchable for you?

As attractive as an immediate annuity may seem, there are many points that should be considered. There is one major catch in particular. In addition to the need for a large amount of money right at the start, the term of the immediate annuity also plays a very important role.

Lifelong immediate annuity – how long?

It is often said that an immediate annuity is paid out for life. But how long is lifelong? Insurers like to assume that everyone reaches a biblical age. In most cases, however, the policyholder naturally never reaches this age, and therefore less money is paid out than was originally paid in. This benefits the insurance companies, but not you as the consumer.

Anyone thinking about retirement provision usually also considers including their spouse or children. This is possible with an immediate annuity, but only with deductions. It is therefore best to only take out an immediate annuity for yourself and make other provisions for your loved ones.

If you still want to protect your loved ones with your immediate annuity, you can agree a pension guarantee period with the insurer. However, the insurance company will of course charge you for this. In most cases, a period of ten to fifteen years is agreed. If you die before the pension guarantee period expires, your loved ones will receive the pension payments for the remaining term.

Alternative to the immediate annuity

So we can see that the immediate annuity has some disadvantages and risks. The pension is only paid for as long as you are able to receive it. Without an expensive special agreement, your descendants will go away empty-handed. To put it in a nutshell, the return depends on how long you live. But is there no alternative that solves this problem? Yes, there is: a property as an investment that you can bequeath in full – in contrast to the classic immediate annuity. But how does that work?

Consider the amount you would put into an immediate annuity as equity when purchasing a property as an investment. Depending on the amount, this one-off amount can even finance the entire investment property. If the investment property is purchased, rent is paid from day one – like an annuity. If the property is partly loan-financed, your tenant pays interest and repayments. As a rule of thumb, the higher the amount invested, the higher the monthly pension (rental income). You can kill two birds with one stone with a property as an investment:

  • You receive a small pension for life
  • You can bequeath the apartment to your descendants

This would not be possible with an immediate annuity. Incredibly, with investment properties you can often even speak of positive cash flow properties from day one. In contrast to immediate annuities, however, this return does not dry up. As long as the property is rented out, it will generate money for you, even after your death.

You can easily bequeath a property to your descendants. This way, your children receive a paid-off property and are protected for the future. In addition to tax advantages, a property also offers protection against inflation. While money loses value over time, a property can be expected to increase in value. For these reasons, we believe that a property is a perfect alternative to an immediate annuity.