What Is a Fixed Index Annuity?

A fixed index annuity is a much simpler financial tool than a variable annuity. The insurance company guarantees a level of return so you always know exactly how much you’ll be receiving at the payout phase. The insurance companies place the investments in low-risk portfolios. Such as corporate bonds or government securities, that are very unlikely to lose value.

Like other forms of annuity, a fixed index annuity is tax-qualified. The inland revenue doesn’t impose taxes until the withdrawals begin. For top level taxpayers in particular, that can make for significant savings. A fixed index annuity becomes not just a reliable way of earning a future income. It’s also way to earn that extra money while lowering your tax payments.

Fixed index annuity infographic

Those tax benefits are one of the advantages of a fixed index annuity. But this kind of investment vehicle also has a couple more.

Fixed Index Annuity Defined

A Low-Cost, Reliable Annuity

First, they’re a relatively cheap form of annuity. Because they’re much more simple than the complex portfolios that variable annuities need, the fees are often lower—although they’re still likely to be higher than the fees charged for other kinds of investments.

But the big advantage is their reliability. When you buy a fixed annuity, you ensure that you’ll receive a particular income to supplement your retirement. As long as you make the payments, you can count on those extra revenues.

As always, it’s worth remembering that money paid into an annuity is not liquid. Even fixed-rate annuities carry surrender charges for early withdrawals, and the tax authority will have its own demands. Like other annuities, a fixed index annuity is only for people who really won’t need the money until they reach the withdrawal phase.

Annuities Are Unsecured

And while the government guarantees money placed in bank accounts, there’s no insurance for money placed in an insurance company’s annuity policy. People who buy fixed rate annuities are usually looking for stability and reliability. They want to lower risks and know that money they don’t need now will be available when they need it in the future.

So if you are thinking of purchasing a fixed rate annuity, do make sure that the insurance company you use is financially secure. You’ll probably be better off paying a slightly higher fee. This helps you feel confident that the company will still be around in fifteen or twenty years. This over saving half a percent and worrying about being left with nothing.

So a fixed rate annuity is a useful, if slightly expensive, way to buy a guaranteed income in the future. It’s relatively simple to understand and follow.

If you’re looking for something slightly more complex, more risky but still relatively simple to follow, you could try an indexed annuity.

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