A fixed annuity refers to an insurance contract that provides a guaranteed rate of return to contributions made to an account. Variable annuities are the opposite of fixed annuities. The rate of return on variable annuities fluctuates based on market conditions. The return on a fixed annuity will remain the same or fixed during the period of the contract. Think of a fixed rate annuity as being a type of stable long-term investment vehicle.
People can purchase fixed annuities outright with a lump sum payment. Alternatively, they can be purchased with payments made over time. The period when a fixed annuity earns the guaranteed rate of return is known as the accumulation phase. A payout phase begins when the annuitant or owner of the annuity decides to receive income or payments from the annuity. Depending on the type of annuity, the payments can last for a certain number of years or continue until the annuitant dies.
One of the major benefits of a fixed annuity is that contributions made to the annuity grow tax-deferred. This means that contributions made to the account will not be taxed. Once the annuitant or annuity owner receives payments, there will be a tax on the gains from the interest accumulated in the account. The premiums paid or the contributions made to the account will not be taxed. A ratio in the form of a percent will determine how much money is taxed from the annuity payments.
Besides tax deferment, there are a bunch of other benefits to a fixed annuity. Guaranteed rates of returns in an annuity can be a great thing to have, especially when planning for retirement. They provide a hedge against market volatility. You will also know what kind of return you will have, and this predictability is appealing to many people.
Another benefit of fixed annuities is that the annuity owner can convert the fixed annuity into an immediate annuity whenever they want. This will begin guaranteed income payments specified in a contract or based on or formula written in the annuity contract. Keep in mind that the longer you hold onto and contribute to an annuity, the greater your future payments will be.
Fixed annuities have their drawbacks. They are considered to be illiquid and come with high fees when compared to other investments. Owners of a fixed annuity are limited to the amount of money they can withdraw from the account each year. The withdrawal limit is typically 10% of the account’s value each year. If someone wants to withdraw more than 10% of the money in the account, additional fees could be imposed by the insurer.