Chelsey Tucker graduated with a Bachelor of History degree from Metropolitan State University in 2019. She now writes about insurance with her specialty being life insurance and has been quoted on Help Smart Phone and MEL Magazine.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like

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Reviewed by Daniel Walker
Licensed Auto Insurance Agent

UPDATED: Mar 19, 2020

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How does a 412 annuity pension work?

When you choose a 412 annuity pension, you make an annual premium payment into the annuity. Then, when you reach retirement age, you receive monthly, quarterly or annual payments, based on your contract with the insurance company.

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If you think that this sounds an awful lot like a regular annuity, you’re right, the basics are very similar. There are, however, some major distinctions that you have to consider.

What differentiates a 412 annuity pension from a regular annuity?

There are four main differences that set a 412 annuity pension apart from a regular annuity:

  • The first major distinction is that a 412 annuity pension is only for small businesses; as an individual you cannot invest in a 412 annuity. If you are an individuals looking for an investment opportunity to plan for your retirement, then you should look into a fixed deferred annuity, variable deferred annuity, single premium immediate annuity or a single premium deferred annuity.
  • Another major distinction is that a 412 annuity pension requires a large annual investment that cannot be changed without extenuating circumstances. This means that if you invest in a 412 annuity with a contractual agreement of $40,000 a year, then you must pay that amount every year or risk forfeiting your annuity. This is a pretty big deal as most individuals want the flexibility of paying into their annuity what they can afford; a 412 annuity doesn’t offer this flexibility.
  • There are also minimum contribution requirements and they are quite large. In fact, you will probably find that the lowest contribution option you can find is $40,000 annually. In many cases the minimum will be even higher than this. You cannot pay in monthly installments either; this is a once a year contribution.
  • You also cannot withdraw any money from a 412 annuity for any reason. This also means that you can’t surrender this type of annuity. Once you start this investment, you are stuck with it, so to speak.

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Why invest in a 412 annuity pension then?

You may be thinking that with all of the restrictions that a 412 annuity pension has, that it isn’t worth investing in at all. For some people, this is true. However, if you are a business owner that hasn’t had the time or the money to invest in some sort of savings and you suddenly find yourself reaching retirement age, then this may be an excellent option for you.

Many small business owners spend many years reinvesting any of their earnings right back into their business, never taking the time to build up savings or even plan for the future. In many cases it is business first and self second. That is why so many small business owners continue to work well past retirement age; because they never took the time to put aside retirement savings and they have to have the continuing income in order to survive.

One of the biggest benefits of a 412 annuity pension is that it is fully insured by the government. This means that if you invest with an insurance company, which is the only way you can purchase a 412 annuity, and the insurance company bankrupts before you are vested in your 412 annuity, you will get your capital back from the government.

Another major benefit is that a 412 annuity is 100% tax deductable. This is the highest tax deduction that you can get on any investment. Businesses find this to be an excellent reason to choose a 412 annuity for their retirement plan over other options.

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Can any small business invest in a 412 annuity pension?

While any small business has the right to invest in a 412 annuity, not every small business will be able to, financially. As mentioned before, the requirement for a 412 annuity is a very large annual premium.

You can choose to pay premiums for as few as 5 years or for as many as 20 years, but the average investment is 5 to 10 years. Now you have to consider whether or not your business can afford to pay $40,000 or more a year to a pension plan that you cannot close or access for any reason. If the answer is no, then this is not an investment option that you should choose.

In order for this to be a viable option for your business, you need to have a profitable business that has grown and continues to grow. The thing is, many businesses that are profitable don’t need this type of retirement option because their profitability has allowed them to put other retirement plans into place.

Of course, if your business only recently became highly profitable, then you may not have something in place, making this an ideal choice for you.

In addition, if you have more than five employees, you may not meet the minimum requirements of an insurance company to invest in a 412 annuity. You see, even though a small business can have up to 50 employees and still be considered a small business, this type of investment requires such high annual capital that, when you have over five employees, there is the risk that in a bad year you will have to make a choice between paying your premium or paying your employees.

This will not always be the case, however, and it will behoove you to investigate the terms of a 412 annuity between insurance companies. You will find that the terms and conditions will vary at least a little bit, giving you some leeway in terms of employee requirements as well as annual premium payments.

What happens if you can’t pay a 412 annuity payment?

This is where there is a risk when investing in a 412 annuity. If your business has a bad year you may lose all of your investment if you can’t pay your premium. Fortunately, not every insurance company is inflexible and there may be other options for you.

The first thing that you need to do is speak to your insurance agent the second you determine that you can’t afford to pay your premium. Your insurance agent may be able to work with you, but there is not guarantee.

If you realize early in the year that a large annual payment isn’t going to work, your insurance company may allow you to make several smaller payments throughout the year to ensure that you reach your total premium amount.

In other cases, the insurance company may be willing to lower your premium requirement for that one payment, placing you back on your regular plan after that year. If, however, you continue to be unable to make your payments then you will lose your annuity.

You may also be able to renegotiate your premium payments to a lower annual commitment, but for a longer period of time. This, however, is rare, and may require you to pay a penalty for changing the terms of your contract.

It is important that you read the fine print on your 412 annuity contract to determine the flexibility of your insurance company. They will put in writing all of the exclusions and whether or not you will forfeit your investment if you miss a premium.

If you are interested in a 412 annuity, then you need to use our comparison tool to find the right insurance company to purchase your annuity from. Because you can only purchase a 412 annuity from insurance companies, this is an important step in the process because you will find that different insurance companies have different terms and fees for their 412 plans.

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