Avoiding Annuity Penalties
Penalty Fees
   Annuity Penalties | Penalty Fees

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Why do Banks Charge Annuity Penalties

A lot of people have trouble understanding why banks would charge a fee for the removal of the funds that they have set aside. After all, it is the person's money; shouldn't they have access to it whenever they want? Well, that is not the case when dealing with annuities and some other bank products. The fees being tacked to the plans have actual purposes, beyond making money for the bank and are essential to the financial success of the bank. Annuity penalties help to protect the entire bank and help to protect the customer as well.

Annuities are unique bank products. For an annuity to work the individual places a certain amount of money in the bank and that amount gathers interest. In addition to the interest, the initial fund is used to pay the customer on a preset basis a preset amount of money. This preset amount of money that is given to the customer at a specific time is based upon several factors. The customer's age, the amount of money deposited and the yield rate locked into are all factors used in deciding the amount of money the annuity will pay out. The normal money being paid out does not incur any annuity penalties. The income will be taxable income until the individual reaches retirement age.

The base money in the annuity cannot be touched without incurring annuity penalties. These penalties are in direct relation to the amount of money that is removed from the annuity. There is a specific rate that is charged against the removed money. This amount varies by bank and year and therefore it is impossible to know the amount before inquiring about annuities at the specific bank. No other annuity penalties exist through the banks and government. It is desirable for people to plan for their retirement and their future and therefore these accounts are encouraged, rather than penalized.

There are actual reasons for the annuity penalties. The primary purpose of the penalty is to protect the bank. Since the annuity pays out to the customer, the bank stands to lose money if the money in the annuity becomes decreased after the customer receives a large payment. This loss of money on a single occurrence does not endanger the financial institution but if the process were to be repeated by other customers, the bank or other financial institutions may see a lessening in their monetary base and financial security. This would then endanger the other accounts in the bank such as the checking and savings accounts. The bank would no longer be able to offer loans and mortgages and the financial process could be in danger of stopping.
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