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Immediate annuity with one-off payment

Private retirement provision to keep one´s living standard

There are many opportunities to accumulate capital for a private retirement plan that complements pensions paid by the government and the former employer. There are special savings schemes, life or retirement insurances as well as investment fund schemes. All these products, however, have one thing in common: a certain amount of money has to be paid every month to accumulate capital for a monthly payment after the investor retires.

But what about private retirement provisions if somebody has, before his retirement, invested his money into other products and therefore has "only" access to a certain amount of money around the age of 65? This may be the case if the customer has invested in stocks or fixed-interest bonds, earning him money when these are sold, yet there is no life-long pension plan with monthly payments in place. However, there are financial products guaranteeing exactly these monthly payments. Basically, there are two versions. On the one hand, the customer wants to receive all interest and some amount of the initial capital every month, therefore payments will end at some point in the future. Alternatively, monthly payments can be interest-based only, leaving the initial capital in place. Both versions are offered by a large number of banks and insurance companies. It is fairly easy to understand how the payment scheme works.

The customer pays a certain amount of money he has at his disposal. Afterwards, he can decide whether he wants to get paid only interest or interest and a certain amount of the initial capital every month. If the customer pays $200,000 up front and chooses to get his monthly payments based on interest only, this would amount to $10,000 at an interest rate of five per cent, i.e. $833 per month for the rest of his life. All the money he paid in the beginning, in this case $200,000, will be there after his death. If he wants the initial capital to be paid out as well, the client has to choose for how long he wants to get monthly payments as the amount is calculated on that basis. If the customer retires at 65 and the average life expectancy is around 80 years, one could go for a 20-year plan to be a little above average. With the same amount of money in the beginning, monthly payments would be around $1,300 in this case as the remaining capital continues to generate some interest every year.