A fixed annuity is a type of retirement annuity that can help investors protect and
grow their money via long-term investments that offer guaranteed minimum returns over set period. These investments allow senior investors to lower the overall risk of their investment portfolios as annuities are backed by the corporate credit of the insurance provider.
A fixed retirement annuity is set in motion by the money the annuity holder pays in the form of a lump-sum investment. After the life insurance receives the initial payment, the money is invested in a pool that contains low-risk assets. The annuity provider then ensures investment growth by fixed amounts, which then generate an income stream for the buyer over a specified time frame. The investor may choose to receive income in one lump sum or a number of payments over the set time frame up to the entire lifetime of the investor. Payments from a fixed annuity may also be made to two individuals over a course specified in the annuity contract.
Immediate and Deferred Annuities
Your fixed annuity may also be classified as a deferred annuity or immediate annuity, depending on the structure of your annuity payments. An immediate annuity is a type of fixed annuity that generates immediate income for the holder, while a deferred annuity gives the initial investment tax-deferred growth before the payments are made. Prior to the payment period of the deferred annuity, the capital is converted into income via a process called annuitization.
Annuitization from a deferred annuity is most efficient for the investor as the initial investment grows with tax deferral benefits while generating substantially larger profits through compound interest growth. Because the lump-sum payment the investor has made grows tax-deferred through a low-risk pool of assets over a longer time frame, the income is guaranteed to result in a return rate that is more profitable than what Certificates of Deposit or CDs provide. The investment risk is also much lower than many other investments as the provider is responsible for the investment risk, making it a viable choice for retirees.
While the risk and cost associated with these kinds of annuities are relatively low while generating decent yields for the investor, you will need to consider its inherent disadvantages before you purchase one. A fixed annuity may provide a balanced return with superior investment appreciation in comparison to CDs and other investments, this type of retirement annuity requires the investor to sacrifice some of the liquidity of his or her retirement funds.