What is the Definition of a Fixed Annuity?

A fixed annuity may be a good option depending on your personal financial situation. It offers safety of principal, competitive interest rates and other benefits.

Who Offers Fixed Annuities?

Fixed annuities are insurance products offered by insurance companies. They are not to be confused with fixed index annuities, variable annuities or immediate annuities. Financial professionals who are contracted with insurance companies or banks sell fixed annuities.

How Does a Fixed Annuity Work?

A fixed annuity works much like a certificate of deposit (CD). Interest is credited annually based on a declared rate by the insurance company. Some insurance companies will offer a higher rate in the early years of an annuity contract but reserve the right to drop the interest rate down to contractual minimums in the later years.

What Are the Features and Benefits?

The main features and benefits of a fixed annuity are safety of principal, tax-deferred growth and the ability to access funds within the fixed annuity with some limitations. A majority of people who are using fixed annuities in their retirement planning are interested in safety of principal. Because fixed annuities earn a fixed rate of return each year, they are not based on the stock market or any other volatile index. Annuity owners enjoy knowing that they cannot and will not lose money. Annuity owners also enjoy tax deferred growth, meaning they don't have to pay tax each year such as a CD owner does. Annuity owners enjoy triple compounding, which means that they are earning interest on their principal, interest on the interest they earn, and interest on money they might have had to pay in taxes if they weren't using a tax-deferred product. Many insurance companies will also allow annuity owners to withdraw up to 10 percent a year without incurring any charges.

What Are the Drawbacks?

There are a few drawbacks when it comes to fixed annuities. Declining surrender charges typically are present in the first 5 to 10 years of the contract, meaning that if the annuity owner withdraws more than the customary 10 percent a year from the annuity, a surrender charge will be assessed. This percentage is higher in the early years and declines each year until the surrender charge is zero. Annuities are also retirement accounts, meaning that any funds withdrawn before age 59 1/2 typically will carry an IRS-imposed 10 percent penalty as well.

What Do I Do Next?

Read and understand all fixed annuity product specifics before investing any money. Be sure to have all your questions answered and have done research on the strength of the insurance company you are considering using. Be sure to also seek the advice of competent professionals who can explain the pros and cons of annuities and how they relate to your personal financial situation.