What Is A Fixed Annuity?
By Dana Anspach. Money Over 55 Expert
Dana Anspach has been About.com's MoneyOver55 Expert since 2008. She is also a contributor to MarketWatch as one of their RetireMentors .
Dana is the founder of Sensible Money, LLC, a fee-only (meaning they sell no financial products for a commission) professional services firm which offers retirement income planning and investment management services.
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A fixed annuity is a contract with an insurance company. You give them your money to manage, and in exchange they pay you a guaranteed return.
Deferred Fixed Annuity
With a deferred fixed annuity, you receive a guaranteed amount of interest which accumulates inside of the annuity contract. The interest is tax deferred, so no income taxes are paid until you take a withdrawal.
A deferred fixed annuity may have high surrender charges that are in place to prevent you from withdrawing money for a
period of 5, 10, or more years.
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Most deferred fixed annuities have a feature which allows you to access up to 10% of the contract value each year without having to pay the surrender charge .
Immediate Fixed Annuity
With an immediate fixed annuity. you exchange your lump sum of money for a guaranteed stream of income from the insurance company. Once fixed annuity payments begin, they do not change, which means they will not increase with inflation.
Keep in mind, once these annuity payments begin, you no longer own, or have access to, the principal.
You simply have a right to the income they have promised you.
Once you choose to annuitize your contract, which means you trade in your lump sum for a guaranteed stream of income, you will have to choose the term of your payments .
When considering a fixed annuity, compare it with alternatives that may offer more flexibility, such as certificates of deposits, or a ladder of high-grade bonds that allow you to keep your principal with minimal restrictions on accessing your money.Source: moneyover55.about.com