YOU ASK:

When is a fixed annuity a good choice?

WE ANSWER:

If you're someone who prefers stability, then a fixed annuity is a good choice. This is especially true if the rates guaranteed by the fixed annuity are higher as compared to other investments that are also considered "safe".

Fixed Annuity vs. Variable Annuity

A fixed annuity will provide a steady and consistent stream of payments. Once a rate of return is promised this is guaranteed for the annuity. This means that regardless of the condition of the investment market, you will stand to receive the promised amount.

This is in contrast with a variable annuity, where rates of return may rise or fall depending on the market condition. If the market is good, then you can expect a high rate of return, if the market is bad, then you will have to face a lower rate of return. A variable annuity holds some risk.

Advantages

Here are the advantages of a fixed annuity:

  • Less risks. The fixed annuity guarantees a fixed interest rate for a set period. After the guaranteed period has passed, a traditional fixed annuity may have fluctuating interest rate but these rates will always be higher than the set minimum. You are assured that regardless of what will happen in the investment market, you get a guaranteed interest rate.
  • Taxes are deferred. During the "accumulation" period, you don't pay taxes. Instead, all the money you put into the fixed annuity is allowed to grow faster. It is only when you make withdrawals from the annuity that taxes will be charged. This will mean further savings for the annuitant if he drops tax brackets during the time when the annuity starts to pay out.
  • Higher rates as compared to other interest-based investment vehicles. Even though rates are guaranteed for a specific period in a fixed annuity, these rates are usually higher compared to some investment vehicles. All you need to do is make the right choice of annuity company and the length of the contract.
  • Ability to withdraw. A fixed annuity can allow you to withdraw partial amounts without having to forfeit your interest income and without having to liquidate the account. In contrast, a CD does not allow partial withdrawals and can charge larger penalties when you decide to cash out before it matures.

Although a fixed annuity is not considered as flexible as other investment options, if you have no plans of using the money in the near future and would rather save it for a future event (such as retirement), then a fixed annuity is a good and safe choice.

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