What Does Fixed Annuity Mean?
A fixed annuity is an insurance contract where the annuitant, or annuity holder, makes a lump sum or series of contributions to the contract in exchange for a guaranteed interest rate for a certain period of time. At a later agreed upon date, the insurer makes regular payments to the annuitant based on the chosen payout option.
Insuranceopedia Explains Fixed Annuity
Fixed annuities can either be deferred or immediate. Immediate fixed annuity is where the payment is determined by the person’s age and size of annuity during retirement. In deferred life annuity, payment is affected by the current interest rates.
One of the basic terms of most fixed annuity contracts is that if the annuitant chooses to withdraw money before turning 59 and a half years old, they will be charged an early withdrawal penalty of at least 10%. As long the annuitant does not withdraw money, the principal amount invested will remain tax-deferred. For example, a man invests $100,000, which grows to $200,000 at the time of his retirement, and he becomes entitled to monthly payments of $500. The IRS will only tax him for $250, which is considered earnings, while the other $250 is presumed to come from your principal.
While fixed annuities guarantee continuous income after retirement, the payments do not change regardless of inflation or a rise in the cost of living. As such, an annuitant may find the monthly payment insufficient to keep up with their expenses.