Fixed Rate Annuities

Fixed rate annuities are the simplest, lowest risk type of all annuities. There is one singular lump sum investment that can be paid back over the course of 3 to 15 years. The interest rates the annuity earns can vary quite dramatically from one plan to another, and are also influenced by the standard interest rates of the market at the time the plan is written. With fixed rate annuities, one has the option to begin receiving payments immediately or defer them until their terms expire. The interest rate is locked for the number of years agreed upon in the contract and will not change despite fluctuations in the market.

Fixed Rate Annuity Terms

All fixed rate annuities will have a set number of years for their term in which to earn interest. However, there are lifetime provision options that will enable the investor to continue receiving a monthly payment on their annuity even after the term itself has expired. Most retirees find this to be a very attractive option since there is really no way of knowing exactly how long one will live after leaving the workforce.

With regard to interest, the longest running terms generally earn the highest rates. Therefore,  15 year fixed rate annuities will earn more during one interest cycle than a 3 year annuity. Interest is usually compounded, so an individual earns on their dividends as well as their original investment. There may also be life insurance provisions built into the terms that will provide benefits to a spouse or loved one in the event of the investor’s death, making the need for a separate life insurance policy obsolete.

Fixed Rate Annuity Tax Benefits

Fixed rate annuities can allow investors to award an inheritance to their loved ones tax-free. Additionally, one may be able to gift a certain amount to other individuals on a yearly basis with neither party being responsible for paying taxes on the amount. These benefits make fixed rate annuities very attractive to many people who wish to provide as much money as possible to their loved ones after they have passed on.

Fixed rate annuities also grow tax-deferred. This means that no taxes are due at the time the interest is accumulating. However, once the annuity payments begin, it is considered to be income and taxes will become due at that time. The benefit here is that there are no capital gain taxes that must be paid, unlike other types of retirement income investment accounts. There may be tax penalties for withdrawing funds from the annuity before reaching the retirement age, so individuals should avoid purchasing fixed rate annuities that will begin paying out prior to that time.

Limitations of Fixed Rate Annuities

The one real drawback to fixed rate annuities is that funds cannot be added to them once the terms are set. However, individuals may purchase as many annuities as they wish, so if additional investment funds become available in the future, they need only contract for a new annuity.