Why the Fixed Annuity is Popular in a Bad Economy?

During periods of economic decline, people are often inclined to seek safer investments. A fixed annuity is still considered to be a conservative investment; therefore, many older investors are now choosing this investment vehicle, instead of mutual funds or variable annuities.

Who Needs a Fixed Annuity?

As people approach retirement, they often are faced with the following question: “What should I do with my retirement money at work or in an IRA account? “ This is not always easy to answer. However, when stocks are performing poorly, like now, people are reluctant to invest in the stock market. Instead, individuals seek the safety of guaranteed investments, such as the fixed annuity.

Some people purchase fixed annuities for other reasons. As part of a lawsuit settlement, the defendant may be required to pay damages that could result in the purchase of a fixed annuity for the defendant. In other cases, individuals may buy a fixed annuity after receiving an inheritance or an enormous tax return. Otherwise, you can generally use a fixed annuity to shield assets from probate court, provided that you name a living beneficiary.

How Do You Earn Interest With a Fixed Annuity?

Unlike stocks, mutual funds and variable annuities, the issuer of a fixed annuity is obligated to pay the owner of the annuity a fixed rate of return, regardless of the stock market’s performance. For example, if the annuity issuer declares that all annuities will earn 5% for 2009, you, as the annuity owner, will see your annuity increase by 5%, not more or less. In general, you will not find a fixed annuity that pays less than 3%, in any given year; however, you will need to refer to the terms of the annuity contract, which explains the annuity’s minimum interest rate.

Fixed Annuity’s Drawbacks

The fixed annuity does have some negative features. Surrender charges, for example, often deter individuals from withdrawing more than the free withdraw provision of the policy, prior to the expiration of the policy’s surrender charges. In many cases, the most common surrender charges last from five to seven years, depending on the policy. Furthermore, if you are under the age of 59 1/2, you may incur a 10% penalty from the IRS for early withdraw from an annuity, in addition to taxes that would be due on the earnings if the annuity is classified as non-qualified; otherwise a qualified annuity would require you to pay taxes on the earnings and possibly the original investment. Please see a tax accountant regarding the taxation of annuities.

Summary

The fixed annuity is not considered a risky investment. The buyer must be aware of the annuity issuer’s credit rating. If the annuity company becomes insolvent, the annuity owner may lose his or her investment. Otherwise, the annuity owner will receive a fixed rate of return for the contract year. The annuity may guarantee the original interest rate for a year or two, and then the interest rate is decided by the annuity company’s board of directors, but the interest rate can never be lower than what is written in the annuity contract or what is required by law.