What is a Fixed Annuity?

A fixed annuity is an insurance product which protects against loss and generally offers fixed rates of return for several years, and then periodically changes based on current rates. Payouts can be lifelong, or you can choose a specific number of years or months. Fixed deferred annuities earn interest at a rate that is set by the insurer.

  • The rate is set for a certain time and will usually not alter for a year or rate period. After the rate period ends, the insurance provider will set another fixed interest rate for another rate period.

  • The rate can be higher or lower than the previous rate. Fixed deferred annuities have a fixed minimum interest rate — the lowest rate which the annuity will receive. It is set out in the contract and disclosure and cannot alter as long as the annuity is yours.

Fixed Annuities Offer

  • Secured growth with fixed interest rates that guarantee that your money is not affected by volatility in the market

  • Deferred income tax until you withdraw earnings as income

  • Flexible payout options that allow you to receive payments for a specific period or the rest of your life

  • Free annual partial withdrawal access when you need it

While you accumulate assets through a deferred fixed annuity, your investment is increasing tax-deferred. The insurance company agrees to pay you no less than a specified interest rate during your accumulation years. You can obtain a pre-determined fixed sum of money, usually every month (like a pension), with an immediate fixed annuity – or when your deferred annuity is annuitized.

These payments can last for a specified period, such as 25 years, or an unspecified period, such as your lifetime or your spouse’s lifetime.

A Guaranteed Revenue Stream

A fixed annuity’s predictability makes it a widely known option for investors wanting a guaranteed revenue stream to supplement their other investments and retirement income. Fixed annuity payouts are not influenced by market volatility, and they can give financial security to investors who want to make sure they have sufficient funds to take them into retirement and cover expected expenses.

How a Fixed Annuity Works

How your fixed annuity money will grow will be simply spelled out in your contract. This may be:

1. A Fixed Dollar Amount

2. Interest Rate

3. Other Structure Specified in the Contract

By comparison to variable annuities and indexed annuities, fixed annuities do not relate to portfolio performance or any other investment.

Income payments from a fixed annuity can be guaranteed for life or a specified number of years, based on the terms of the contract defining the annuity payout options.

You can choose to receive it in a lump sum too. This is known as an annuity that is guaranteed for many years.

How Fixed Annuities are Taxed

How your fixed annuity money will grow will be simply spelled out in your contract. This may be:

1. Contributions will be tax-deductible if the annuity is tax qualified, and investment earnings will increase tax-deferred until the annuitant begins to earn income

Like IRAs and other retirement accounts, this tax-deferred income can grow and compound faster over time than when the money is in a regular, taxable account.

2. The annuitant will have to pay the tax for them at their normal income tax rates once the payouts start — not capital gains rates, which are usually lower

That’s true for most types of retirement accounts, too. By then, though, the annuitant may be in a lower tax bracket, as many individuals are in retirement.

Important Considerations

1. Removing Market Risk

While a fixed annuity can remove market risk from your returns, there are other risks to take into account when deciding whether a fixed annuity is meant for you.

2. State Guarantees May Exist

In the event of a failure of an insurance company, state guarantees may exist, but annuities are not secured by the FDIC, SIPC or any other federal agency if the insurance company issuing the contract fails.

3. Inflation Protection Annuities are Available

Typically, payments in a fixed annuity do not have cost-of-living modifications or buying power to keep pace with inflation, so the value of the money that you receive in your payments may decrease over time. Inflation protection annuities can be purchased, but the overall cost is substantially higher.

4. Reimbursing Your Premiums

Once you pay the insurance company the premium, it can be hard to get your money back. Even if you receive only a few payments under a fixed annuity contract, depending on the option you chose or were available to you, the insurance company might not be required to continue paying your spouse or reimburse your estate for your premiums.

5. Surrender Charges

If your fixed annuity changes and you want to withdraw your money early, you may incur surrender charges which will be deducted from your policy value.

6. Outliving Your Savings

Outliving your savings is one of the greatest retirement risks. Fixed-income annuities can help you prepare for the lifestyle you’ve worked so hard to achieve, knowing you’ll have an income stream that will last throughout your retirement period.

6. Stable Income, Stable Lifestyle

With this guaranteed stream of retirement income, you are assured that you know some of your income is secure. This can help you manage your retirement expenditure accordingly.

While the rate of interest you earn may change over time, you’ll always know how much money you earn. Whenever you are ready to get your retirement income, you’ll have to choose from a full range of payment options.

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