Fixed annuity is the annuity scheme where one gets a fixed or constant return from the investment made. It has various sub-categories depending on the withdrawal of the corpus accumulated, the premium that needs to be paid, the term for which one is keeping the money etc. The next few paragraphs elaborate on the various types of fixed annuities.
Fixed annuities can be of the deferred or the immediate type. In the deferred fixed annuity, the premium paid is collected in the fund till the accumulation period gets over and the corpus accumulated with the interest can be withdrawn immediately or as regular payments. Immediate annuity offers a payment just after paying the first installment. This could be on a monthly, quarterly, bi-annually or even annually. The payment will depend on the interest rate on offer, the size of the installment paid, the length of the contract bought. The larger the investment made and shorter the time, the higher the returns.
A Fixed annuity may be of the perpetuity type, if the corpus to be invested is paid upfront and then payments are withdrawn at regular intervals.
Fixed annuities are beneficial for people looking to invest for a long term or as a pension scheme. The advantages of buying fixed annuities include lesser risk as the sum an individual will receive is certain. Unlimited investment is another big factor here. The annuity provider may even attach a proper life insurance scheme with such annuity plans, putting paid to burgeoning life insurance market demand. The amount invested is tax deferred and one can give gift amounts of up to $10,000 tax free to their loved ones and this extends to more than one person. One can also bequeath the collected sum to their near and dear ones without any tax on property or probate or even death! What’s more is that fixed annuities offer cost of living indexation. It revises the value of your corpus deposited so that its real value does not depreciate in periods of rapid inflation. Inflation hedging is automatically incorporated in one’s plan. The fixed premium one needs to pay at regular intervals offers one a better insight into their consumption decision. These annuities pay well on the investment made in plans over 5 years. As a retirement benefit scheme, fixed annuities are definitely lucrative and one should choose it over other annuities.
However, there are certain pitfalls of fixed annuities. The high guaranteed interest rate might be only for a short period. Returns may not be consistent with lapsing time periods as well. The income withdrawal from the annuity plan prematurely, before the age of 59.5 years, will give rise to penalties like the 10% from the IRS apart from regular taxes. Premature withdrawal of fixed annuities attracts a percentage of the amount to be forfeited to the insurance company. Before buying an annuity plan, one should look for a no load plan. In some plans, one gets the interest withdrawal penalty free but the principal withdrawal attracts a penalty.
Owing to these reasons, it is advisable for people to read the plan document thoroughly and weigh the plan against all the constraints, before investing a large sum in the plan.
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