How Fixed Annuities Work

A fixed annuity is a type of financial vehicle that offers a set amount of return, along with a guaranteed income stream in the future. Contributions to a fixed annuity may be made via a single lump sum, or through a series of deposits over time.

The Benefits of Owning a Fixed Annuity

Fixed annuities provide their holders a fixed amount of interest that is declared by the insurance company that offers them. Because of that, if you own a fixed annuity, you can count on a certain amount of growth in the account, regardless of what happens in the market.

In addition, the funds that are inside of a fixed annuity are protected from stock market volatility - so even during a market downturn, the money that you have inside of a fixed annuity will remain safe.

As with other types of annuities, your funds in a fixed annuity are allowed to grow on a tax-deferred basis. This means there is no tax to be paid on the gain each year. In fact, this money won't be taxed until the time of withdrawal - and because of that, the funds can grow and compound faster than those that are in a taxable account.

That is because the money in the annuity is earning interest on the principal, interest on the interest, and interest on the dollars that would have otherwise been taxed. So, the longer your funds remain in a fixed annuity, the more they can grow.

When the time comes to convert a fixed annuity into an income stream, a set amount of guaranteed income can be counted on for a specific period. For those who choose the lifetime income option, the fixed annuity will continue to pay out for the remainder of the individual's life, regardless of how long that may be. This, in turn, can help to ease the concern about running out of income in retirement.

With all of these benefits in mind, a fixed annuity may be a good option for those who are seeking protection of principal and who are risk-averse, as well as for those who are looking for a fixed and guaranteed amount of income in the future.

Considerations Before Purchasing a Fixed Annuity

Even with the many advantages that fixed annuities offer, there are some considerations to be mindful of, too. For example, because of the guaranteed growth and protection of principal in a fixed annuity, the return on these products can be somewhat low - especially in comparison to the potential growth in equity-related financial vehicles.

Also, if funds are withdrawn from a fixed annuity within the first several years of purchasing it, a surrender, or withdrawal charge may be incurred. In most cases, however, up to 10% of the contract value may be withdrawn each year - even during the annuity's surrender period.

Is a Fixed Annuity Right for You?

Although fixed annuities can offer a number of benefits, these financial vehicles are not right for everyone. Therefore, prior to moving forward with the purchase of a fixed annuity, it can be beneficial to discuss all of your potential options with an annuity expert. Once you have done so, you will be able to move forward with confidence knowing that you have the best tools for meeting your specific financial needs.