Fixed annuity

A fixed annuity is an insurance contract in which the insurer guarantees the principal and credits interest at a rate it declares, backed by its general account. There is no direct market exposure, so the value does not fall when stocks or bonds do. Fixed annuities come in two main forms: deferred contracts that grow at a declared rate, and immediate or deferred income annuities that pay a set amount for life or a period of years.

In a deferred fixed annuity, the insurer sets an initial crediting rate, sometimes with a first-year bonus, and resets it periodically, never below the contract's guaranteed minimum. A multi-year guaranteed annuity locks the rate for the whole term, much like a certificate of deposit. Hypothetical example: $100,000 in a five-year fixed annuity at 4.5% grows to about $124,600 by the end of the term, tax-deferred, if nothing is withdrawn.

Fixed annuities trade liquidity for that safety. Most have surrender charges, often with a free-withdrawal allowance of around 10% a year, and earnings withdrawn before age 59½ face a 10% federal tax penalty. Unlike bank CDs, they are not FDIC-insured; protection depends on the insurer's strength and, up to state limits, guaranty associations. Indexed annuities are legally fixed annuities but credit interest by formula. See fixed annuities: how they work, what they cost, who they suit and Multi-year guaranteed annuities (MYGAs): how they work.