Fixed Annuities
Keep your savings growing safely, then enjoy reliable income for life.
Looking for reliable income in retirement that will last your entire life? Consider adding a fixed annuity to your retirement income strategy.
A fixed annuity is an insurance contract that guarantees the buyer a fixed interest rate on their premiums for a specific period of time. Fixed annuities are good investments for those interested in premium protection, income for life and low risk. A fixed annuity also does not offer any inflation protection, which may be considered a disadvantage to some.
Fixed annuities are the simplest and most straightforward type of annuities. They also provide the most predictable and reliable income stream, usually with the lowest fees.
A fixed annuity can be immediate or deferred. That is, depending on your contract, you may start receiving annuity payments within a year of purchasing your fixed annuity or you may have the payments start at a later time. Deferred annuities typically start payments at retirement.
Predictable Earnings
When it comes to your income in retirement, sure and steady may be just right. By adding a fixed annuity to your retirement plan, you can help protect your savings, then enjoy a predictable source of income for life.
You can feel confident knowing your savings are protected and never invested in the market.
You can ensure your money grows at a predictable rate, with no risk of loss. You can know your loved ones will receive any money left in your annuity after you pass away.
Different annuity providers offer different ways to save under different rules. Providers also vary in the charges they levy and restrictions they place on annuities.
Accumulation & Payout
A fixed deferred annuity consists of two distinct phases: accumulation and payout.
After you decide to buy a fixed deferred annuity, the insurance company sets an agreement to pay you a minimum rate of interest when your account is growing. This is known as the accumulation phase.
During this phase, the current interest rate is applied. This annuity rate is guaranteed for that time period. Interest in your account grows tax deferred during the accumulation phase.
The payout phase starts when you receive regular income from your annuity, this is known as the annuitization period. Depending on your contract, you can choose to receive payments for a set number of years or the rest of your life.
Pros & Cons of Fixed Annuities
With any investment, it’s wise to consider the pros and cons before deciding which choice is right for you.
Pros of Fixed Annuities
- Guaranteed minimum interest rate: A fixed annuity will never earn less than the guaranteed interest rate, regardless of the how the insurance company’s investments perform.
- Premium protection: You cannot lose your initial investment.
- Simple: Unlike variable and indexed annuities, fixed annuities have no complicated formulas for determining the amount of money you will receive in income payments.
- Lowest risk: Interest credited is not dependent on the performance of investments or stocks. This is especially important for retirees, who can’t afford to lose the money they need to pay living expenses.
Cons of Fixed Annuities
- No inflation protection: Growth is fixed and may not keep up with inflation. That means their actual value may decline over time.
- No capital gains tax rates: Money withdrawn from qualified annuities is taxed as ordinary income. It does not get the benefit of lower capital gains rates.
- Surrender charges: If you don’t like the interest rates when they are reset and want to withdraw your money early, you may incur penalties.
Frequently Asked Questions
Is a fixed annuity right for me?
A fixed annuity can be an attractive option for conservative investors planning for retirement because these products offer a predictable interest or earnings. In some cases fixed annuity owners may use the interest earned as income. . When purchasing a fixed annuity, you will know the rate of interest your money will earn and how long it will earn that rate.
Fixed annuities are more predictable and less complex than most other types of annuities, such as variable annuities. This type of annuity is best suited for investors looking to preserve their principal — but who want their money to grow at a rate faster than a savings account or a CD can provide.
How is the rate determined in the fixed annuity?
Unlike variable annuities and indexed annuities, fixed annuities are not linked to stock market performance or another investment. Instead, your money grows at an interest rate determined by the insurance company.
When an insurance company receives your money, it adds it to its general account pool of incoming premiums. The company then invests that money, usually in government securities or high-quality corporate bonds, that earn a slightly higher interest rate than the insurance company pays you.
Your fixed annuity contract will include a minimum guaranteed rate. The guarantee from the annuity company is that the interest on your fixed annuity will not dip below that rate. The company also guarantees the principal investment.
Some types of fixed annuities, such as multi-year guaranteed annuities, lock in the same rate for your entire contract. Others may adjust the interest rate after a certain time.
Some fixed-annuity contracts provide a higher interest rate at the beginning, known as the bonus rate. After the end of the set time period, another interest rate, known as the renewal rate, applies. You can ask your agent or broker for a renewal rate table to give you an idea of what to expect. However, even if the interest rate adjusts over time, it cannot fall below the guaranteed minimum rate specified in your contract.
Are fixed annuities guaranteed?
Overall, annuity funds are not guaranteed by the Federal Deposit Insurance Corporation or any other federal agency. They are regulated and guaranteed by state insurance commissions.
An annuity is only as safe as the insurance company that sells it. While it is extremely unlikely an insurance company will default on your annuity, it’s important to select an insurer with an A rating from one of the major insurance rating agencies, such as Fitch or A.M Best.
FINRA advises anyone shopping for annuities to contact their state insurance commissioner to ensure that their broker is registered and authorized to sell annuities in the state. The regulatory nonprofit also suggests you find out whether your state has a guaranty association that will protect you if your insurer becomes insolvent.
How are fixed annuity rates set?
Fixed annuity rates are set by insurance companies and take into account specific factors, including the premium amounts, current interest rates, and the length or period of time you have chosen.
Can you lose money on a fixed annuity?
You won’t lose money in a fixed annuity so long as you hold the contract to maturity and don’t withdraw early. Withdrawing too much money too soon from a fixed annuity can result in penalties and fees.
What fees and commissions are associated with fixed annuities?
Fixed annuities are the least expensive type of annuities. Generally, there are no commissions out of your principle. Admin fees are the most common and can range from $60-$120 annually. Be sure to read your contract carefully and ask about all fees and commissions.