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A fixed annuity is an insurance contract that guarantees the insurer will pay the purchaser a fixed interest rate on their contributions to the annuity for a specific period of time. Fixed annuities are lower risk than variable annuities, which determine interest rates depending on the performance of the underlying investments.

Fixed annuities are the simplest and most straightforward type of annuities. They also provide the most predictable and reliable income stream, usually with the lowest fees.

A fixed annuity can be immediate or deferred. That is, depending on your contract, you may start receiving annuity payments within a year of purchasing your fixed annuity or you may have the payments start at a later time. Deferred annuities typically start payments at retirement.

In deciding whether a fixed annuity is right for you, you should consider how it works and how it compared with other types of annuities.

What Is a Fixed Annuity?

A fixed annuity is a contract between you and an insurance provider. A fixed annuity provides a way to save money over the long term, allowing interest to accumulate tax deferred.

You pay for a steady stream of income. The insurance company guarantees your principal and a minimum interest rate.

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An annuity can provide you with a safe, reliable income stream in retirement.

How Does a Fixed Annuity Work?

How the money in your fixed annuity grows will be spelled out in your contract. It may be by a set dollar amount, an interest rate or by another formula specified in the contract. Unlike variable annuities and indexed annuities, fixed annuities are not linked to the performance of a portfolio or another investment.

Pro Tip
Different annuity providers offer different ways to save under different rules. Providers also vary in the charges they levy and restrictions they place on annuities.

Income payments from a fixed annuity can be guaranteed for life, commonly referred to as a life annuity or single-life annuity, or for a set number of years, depending on the terms of the contract specifying the annuity payout options. Annuity contracts that pay income benefits for a set number of years are called period certain annuities or term certain annuities.

You may also elect to receive annuity income benefits as a lump sum.

Fixed Annuity Pros and Cons

With any investment, it’s wise to consider the pros and cons before deciding which choice is right for you.

  • Guaranteed minimum interest rate: A fixed annuity will never earn less than the guaranteed interest rate, regardless of the how the insurance company's investments perform.
  • Premium protection: You cannot lose your initial investment, your premium, with a fixed annuity.
  • Income for life: If you purchase a life annuity, you can never outlive your income payments.
  • Simple: Unlike variable and indexed annuities, fixed annuities have no complicated formulas for determining the amount of money you will receive in income payments.
  • Predictable: Since everything is agreed on in the contract, you know what to expect. You don’t have to worry about whether an investment portfolio or the stock market are performing well.
  • Lowest risk: Interest credited is not dependent on the performance of investments or stocks. This is especially important for retirees, who can’t afford to lose the money they need to pay living expenses.
  • No frills: The main disadvantage is fixed annuities do not have the potential that riskier annuities have of yielding greater interest rates if an investment portfolio or stock index does well.
  • No inflation protection: Growth is fixed and may not keep up with inflation. That means their actual value may decline over time.
  • No capital gains tax rates: Money withdrawn from annuities is taxed as ordinary income. It does not get the benefit of lower capital gains rates.
  • Penalties for early withdrawals: Because annuities are designed to help people save for retirement, if you withdraw money from any annuity prior to age 59½, you will be subject to a 10 percent penalty.
  • Surrender charges: If you don’t like the interest rates when they are reset and want to withdraw your money early, you may incur penalties.
Learn about the pros and cons of a fixed annuity from financial expert Juliette Fairley.

Current Fixed Annuity Rates

When funds are building through interest or deposits — before payments begin — the annuity is in what is referred to as the accumulation phase.

During the accumulation phase of a fixed annuity, the current interest rate is applied. This annuity rate is guaranteed for that time period.

After the end of the set time period, another interest rate, known as the renewal rate, applies. The contract will provide details regarding how the renewal rate will be established.

Pro Tip
Some fixed-annuity contracts provide a higher interest rate at the beginning, known as the bonus rate.

Are Fixed Annuities Guaranteed?

Your fixed annuity contract will include a minimum guaranteed rate. The guarantee from the annuity company is that the interest on your fixed annuity will not dip below that rate. The company also guarantees the principal investment.

Overall, annuity funds are not guaranteed by the Federal Deposit Insurance Corporation or any other federal insurance agency. They are regulated and guaranteed by state insurance commissions.

FINRA advises anyone shopping for annuities to contact their state insurance commissioner to ensure that their insurance broker is registered and authorized to sell annuities in the state. The regulatory nonprofit also suggests you find out whether your state has a guaranty association that will protect you in the event that your insurer becomes insolvent.

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Get guaranteed income for retirement by purchasing a fixed annuity today.

Fixed and Variable Annuity Differences

Fixed annuities differ from variable annuities in the way the interest rates are determined. With fixed annuities, interest rates are clearly outlined in the contract. The growth rate of variable annuities depends on the performance of an investment portfolio.

The three main differences are:

Fixed Variable
Interest is determined on the date of the contract Interest depends on performance of investments
Low risk Higher risk
Predictable, simple Complicated, more difficult to understand

Fixed and Indexed Annuity Differences

Index annuities combine the features of fixed and variable annuities. Here are the main differences between fixed and indexed annuities:

Fixed Indexed
Interest is determined on the date of the contract Interest linked to performance of index, such as S&P 500. Guaranteed not to go below a certain level.
Lower fees Higher fees
Predictable, simple Complex

Questions About Fixed Annuities

How are fixed annuity rates set?
Fixed annuity rates are set by insurance companies and take into account specific factors, including the premium amounts, current interest rates, the annuitant’s age and life expectancy and the annuitant’s gender.
What are MYGAs?
A MYGA is a multi-year guaranteed annuity. As the name suggests, these are annuities that guarantee a fixed interest rate for a specified number of years.
What fees and commissions are associated with fixed annuities?
Fixed annuities are the least expensive type of annuities. Carriers charge commissions and may charge administrative fees, transfer charges or underwriting fees. Be sure to read your contract carefully and ask about all fees and commissions.
What are the different types of annuities?
The broadest category by which annuities are differentiated is the investment type — fixed and variable. The next most significant classification refers to the annuitization timeline — immediate and deferred. All annuity types fall under these umbrella categories.
Why should you buy a fixed annuity?
You should buy a fixed annuity if your objective is any of the following: premium protection, lifetime income, legacy (or bequests) or long-term care provision.
Please seek the advice of a qualified professional before making financial decisions.
Last Modified: May 28, 2021

11 Cited Research Articles

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  2. Insured Retirement Institute. (n.d.). Fixed Annuity Calculator. Retrieved from https://irionline.org/research-and-education/educational-resources/retirement-tools-and-calculators/fixed-annuity.html
  3. U.S. Securities and Exchange Commission. (n.d.). Annuities. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/annuities
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  9. Anspach, D. (2018, April 1). How a Fixed Annuity Fits a Retirement Plan. Retrieved from https://www.thebalance.com/how-does-a-fixed-annuity-fit-your-retirement-plan-2389021
  10. Investopedia. (n.d.). Fixed vs. Variable Annuities. Retrieved from https://www.investopedia.com/ask/answers/093015/what-are-main-kinds-annuities.asp
  11. Carey, M. (2018, August 1). The Best Fixed Annuities Available in 2018. Retrieved from https://www.forbes.com/sites/mattcarey/2018/08/01/the-best-fixed-annuities-available-in-2018/#192bcfb64df1