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What is a Fixed Annuity?

A fixed annuity is an interest bearing contract that is geared specifically towards retirement savings. You give them a lump sum amount called premium to manage and earn interest over a period of three to fifteen years in exchange for a guaranteed return. Fixed annuity ha low risk, more liquid, tax deferred and typically has a higher yield than bonds, treasury bills or money market accounts.

A fixed annuity has two modes of distribution: immediate or deferred. With an immediate fixed annuity, you exchange your lump sum money for a guaranteed flow of income from the insurance company. Once fixed annuity payments begin, it will not fluctuate with inflation. It has a stable rate and guaranteed. You know the exact amount of money you will have at the end of the term that is why, it is ideal for retirement planning. All annuities are tax deferred outperforming other kinds of investments. Fixed annuity also offers a higher interest rate. Although it will not be guaranteed as risk free, it minimizes the risk of loss. Perhaps the most useful feature of annuities is the lifetime income option. It allows the annuity holders to accumulate wealth through periodic contributions and guaranteed to receive a monthly income for the rest of their lives. It also comes with a limited periods of guarantee. For example, a fixed rate has been agreed for a period less than the full contract term; if the insurance company drops the interest rate, then, the fixed annuity holder can demand back his money without paying the surrender charge and look for a company that would offer a higher interest rate. It is also important to know the different charges concerning your fixed annuity. There may be other provisions that were not explained to you like early withdrawal charges and the withdraw charge schedule, the penalty free withdrawal allowance or any other hidden fees. There may be disability or terminal illness provisions, and the length of the guaranteed period. Read the contract carefully and digest the full provisions. Most importantly, look for a reputable insurance company that holds diversified investment portfolios that allows them to be flexible when the market moves. Scrutinize their track records, their financial condition and their customer feedback as well. Go for large scale insurance providers whom you can trust and depend on. Invest an amount covered by the Minimum State Guarantee for a sure back up in case the insurance company collapses.

There are also disadvantages when getting a fixed annuity. Income withdrawals before the age of fifty nine and a half years will be charged a tax penalty of ten percent. Income is not considered capital gains but subject to an ordinary income tax. The insurance provider usually penalizes withdrawals if over the yearly allotment. Additional investment cannot be added to the same fixed annuity contract; hence, a new contract should be purchased.

Overall, it pays to consult your wealth management consultant or financial specialist so you can weigh and choose what investment portfolio is best suited to you. Ask questions and feel the market. Retirement is best enjoyed if you are secured and well taken cared of. Your dream of sipping a cold refreshing drink while frolicking on a white sandy beach under the Caribbean skies is not that far after all.