If you are fortunate enough to have been endowed an annuity, then you may not have to wait until retirement to take advantage of it. This doesn’t mean you have to cash out, per se; if you’re going into business, then you can employ the advantages of annuity financing by borrowing against the value of your fund. Here, you will become familiar with the benefits of an annuity loan.

Annuities: The Basics

Firstly, what is an annuity? It’s essentially a retirement fund, paid into by you or left to you by a wealthy relative/friend. This fund is paid into and matures once you reach retirement age, at which point it will release money to you every month. Now, in the case of annuity financing, you receive a loan now that represents you borrowing against the value of the annuity, itself – the maximum term is usually half-a-decade, and you pay only the interest on the principal you borrow in the meantime.

Things to Avoid With Annuity Financing

This is a competitive field, and so there are some potential potholes to avoid if you opt to open an annuity contract instead of an annuity loan. There’s a lot money at stake, since some lending companies allow you to borrow as much as 50% of the value of your total annuity in a lump sum payment. A few things to consider as to the benefits of taking out an annuity loan:

Look Out for Surrender Charges: An actual annuity may charge you something called surrender fees if you “change your mind” within a specified period after you petition to withdraw your cash. The loan variant lacks this charge completely – in fact, this is the primary advantage that annuity financing has over the actual annuity, itself.

Tax Exemptions:  As you probably know, early withdrawal of an annuity will lead to financial penalties such as the early distribution tax. Depending on your age, this tax can be as much as 10%; furthermore, the money you spend will start having income taxes levied against it. With an annuity loan, you needn’t worry about these penalties.

The Single Drawback to Annuity Financing: This drawback is only activated if you default on the annuity loan. Then, you will be responsible for paying the early distribution tax mentioned earlier.