If you’re approaching retirement age and concerned that you might not have saved enough funds during your working life, annuities could be the ideal solution to enjoying the retirement you desire. However, it’s important to understand the risks and costs involved when choosing this form of fixed income investment.

The major difference between annuities and similar types of investments, such as bonds and traditional pension plans, is that the income is generated by insurance companies through underwriting. Insurers invest the capital into various investments, and your income then comes from the monthly returns.

The pricing of annuities is calculated using the same system as other types of insurance, for example, your age, your life expectancy, your gender, etc.. However, some annuities may be tied to the overall performance of the stock market, such as index annuities, meaning the interest rate is based on the performance of certain groups of stocks.

While there are certain risks involved with annuities, as with any investment, the risk level is also limited by the fixed range of interest rates on index annuities – so your investment will be protected even if the stock market experiences a downturn. If you do choose annuities, you should be aware of some hidden costs that may be charged by investment professionals, as they aim to earn higher commissions from the sale – making it important to compare prices and find the best deals.

If you enjoy the tax deferred payments of your pension plans, then you’ll be pleased to hear that annuities can be similarly deferred, although they are not tax free. Annuities can be bought by individuals, and the returns are not viewed as capital gains. If you’re considering investing in annuities and have questions, you should ensure you read through all the promotional and web material available, and then contact an impartial financial adviser to determine whether it’s the best solution for you.

With the pricing of annuities set to change by 2012 under new rulings – and prices decreasing by 2.5 per cent for males to offset a perceived gender imbalance – some investors are biding their time to enjoy lower rates. However, delaying your investment in the hope of receiving higher income is not always the safest method – as not only are higher earnings not guaranteed, but you will also be missing out on the revenue you could have generated while waiting.

The author of this article is a part of a digital blogging team who work with brands like Standard Life. The content contained in this article is for information purposes only and should not be used to make any financial decisions.