To understand the benefits of fixed annuities it requires a basic understanding of annuities in general. Fundamentally, annuities of all kinds (fixed, variable, deferred, equity indexed, etc.) are all insurance company products used as investment vehicles. Both conservative and speculative investors use them as a way of receiving a steady income throughout their retirement years.
Annuities can be purchased with one payment, known as a “lump sum” purchase, or they can receive ongoing payments from the annuitant. Regardless of the type of annuity there is an “accumulation” period where the value of the annuity increases based strictly on the interest rate guaranteed by the insurance company. During this time the annuity grows on a “tax-deferred” basis (which does not require the owner of the annuity to pay taxes on what will eventually be income). Taxation begins when the owner decides to begin taking a payment on the annuity, the terms of which were established at the time of purchase.
A fixed annuity grows or increases on a fixed interest rate. Some insurance companies offer a higher introductory rate with annual growth set at a final, but lower fixed rate, while others simply guarantee a specific percentage on the principle investment minus any payouts.
So, who should invest in fixed annuities? They are beneficial to everyone from those beginning to build a “nest egg” and those entering into their retirement. They can work as supplemental income, or they can be seen as a guaranteed stream of income. There are a few “universal” benefits with fixed annuities, including: tax deferral, no limits to contributions, helpful for estate planning, allow some tax control, they are very simple to acquire and offer flexible payment options.
How are fixed annuities tax deferred? An investor in any kind of annuity does not pay annual taxes on the interest they have earned, and this means two major things – first the annuity will be able to accumulate faster without the impediments of taxation, and second that the investor can determine their tax burden by deciding how much and when to begin receiving an income from the annuity.
There are really no limits to the amount that can be contributed? According to most annuity contracts there are very few limitations or restrictions imposed on contributions. There will usually be some sort of ultimate “cap”, but generally annuities are created to allow the investor an excellent return which means that they may want to increase their contribution to yield a greater income stream.
What kind of flexible payment options are available? The majority of fixed annuities allow the investor to receive a single, lump sum distribution of their total accumulated earnings, or they can take money as needed, they also permit fixed distributions at set intervals (such as every two months, etc.) and they also allow for guaranteed payment amounts each year the annuitant is alive.