Fixed annuities provide an investor with an unchanging amount of income that is paid at regular intervals until the term has ended or a life event has occurred. A fixed annuity has advantages and disadvantages and a wide choice of options that can be added for additional fees.

Advantages

• Premium Payments: The investor has the option of funding the fixed annuity with either a lump-sum payment or installment premiums based on the investor’s available cash flow.
• Rate of Interest: The interest rate is usually higher than bank CDs and is guaranteed for a period that can vary from one to six years. Some fixed annuities have a minimum guaranteed “base rate”, which provides a floor on the rate of interest.



• Guaranteed Rate: The fixed rate is guaranteed and not subject to market downturns. The annuitant, therefore, has the comfort of knowing that he will always receive a fixed amount of income.
• Tax Deferral: The interest income accumulates tax-free. This feature accelerates the rate of return because of the compounding effect. Bank CDs do not have this characteristic. Taxes are not paid until regular income payments begin; the annuitant’s ordinary tax rate will probably be lower at that time.
• Withdrawals: Fixed annuity contracts allow partial sum withdrawals, usually up to 10% annually, without penalty.
• Amount Invested: You can invest any amount into a fixed annuity, unlike the limitations imposed on a 401(k) or IRA.
• Very Low Risk: The only risk is if the issuing insurance company becomes insolvent and your investment goes above your state’s annuity guarantee limits.
• Income Payments: Life fixed annuities have the feature of paying regular income until the annuitant dies. This eliminates the risk of outliving your initial income investment.

Disadvantages

• Taxes: The taxes on income payments are taxed at ordinary income rates rather than at the capital gains rate.
• Withdrawals: Income withdrawals before age 59 ½ have a 10% tax penalty from the IRS. The insurance company will charge a penalty for withdrawals in excess of the free annual allotment.
• Amount Invested: You cannot add more money to a fixed annuity contract, although, additional contracts can be purchased.

Fixed annuities are excellent investment vehicles for long-term retirement planning. They have higher guaranteed returns, tax deferral advantages and security. The negatives aspects are mostly with penalties for early withdrawals and being taxed at ordinary income rates instead of capital gains rates.