Fixed Annuities: Meaning, Benefits & Things to Consider Before Investing

7 min read • Published 12 November 2022
Written by Krishna Deshmukh
Learn the benefits of investing in fixed annuity plans

Annuity plans are insurance policies in which you make lump-sum or periodic payments and receive regular returns. You can customise this return period as per your financial requirement, and there are various types of annuities available such as fixed annuity, variable annuity, deferred annuity, etc.

Fixed annuities are considered to be a safe investment option as you will earn a “fixed” return. 

What Is a Fixed Annuity Plan? 

Fixed annuities are financial agreements between you and your insurance provider that offer predetermined and periodic payments against the investments made during a specific period. For example, if you have invested in a fixed annuity plan at an interest rate of 10% per annum, then you will be receiving a fixed rate of return on your investment regardless of the prevailing interest rates or market fluctuations. 

They have generally considered a low-risk product as they help in protecting capital and providing income payments from your retirement savings.

How Does Fixed Annuity Work? 

When you buy a fixed annuity plan,  first you will have to choose an investment tenure. Usually, these periods are a minimum of 1 year long but can also go up to decades. During this tenure, you can either pay a lump sum of money or a series of payments over time and the insurance company will pay a certain rate of interest. Post this, during your guarantee period you will receive annuity payments or benefits as long as the annuitant is alive. 

As your annuity plan reaches its maturity period, you will have multiple options for withdrawal. You can choose to transfer the accumulated sum to another annuity plan, renew your contract, or transfer your fund into another type of retirement account.

The ultimate option is to annuities your contract (turning your balance into a stream of income), which is the most preferred option. This way, your investments provide you with a steady flow of income, generally for the rest of your life.  

Who Should Invest in a Fixed Annuity Plan? 

Fixed annuities are usually an ideal investment option for investors who prefer stability and security over potential high returns. Most conservative investors like to plan their retirement or future ahead of time and need assured returns. By investing in fixed annuities, they will know how much return they will be earning after investing for a specific number of years. 

Fixed annuities are also less complicated and more easily predictable than other types of annuities, such as a variable annuities. This makes it ideal for investors who want to invest in a plan that provides stability and growth higher than other traditional options such as Fixed Deposits and Certificate Deposits. 

Also Read: Deferred Annuity – Meaning, Types, Benefits and How it Works

What Are the Benefits of Investing in Fixed Annuity?

Annuity plans are opted for earning benefits post-retirement. If you are considering a fixed annuity plan as your retirement investment option, you should know what it will have in store for you:

  • Fixed return rate: As the name suggests, fixed annuity plans offer a fixed rate of return. You will earn fixed returns, and it will stay the same for the entire guarantee period. Although there’s less potential for aggressive growth, conservative investors choose this over variable annuities as it also has no chance of losses. 
  • Tax-deferred growth: Annuities are tax-deferred investment options. This means your investments stay untouched by taxes during the investment period, which leaves more growth potential. However, the sum will be eligible for taxation on withdrawal. 
  • Flexible withdrawal options: Fixed annuities have flexible withdrawal options but you may have to pay penalties. Moreover, it also comes with a death benefit, under which if the annuitant passes away during the guarantee period, the beneficiary is entitled to receive the maturity amount. 

Also Read: Annuity Plans: Definition, Types, and Tax Treatment

Variable Annuities vs Fixed Annuities

Variable annuities and fixed annuities primarily differ in terms of their returns. However, there are also some differences in their features. 

Variable annuities are subject to market fluctuations and hence hold the potential for incurring a loss. On the other hand, fixed annuities do not have any scope for loss of your investment. But they also lack the potential for generating higher returns. 

Look at this table below to have a clarified understanding of variable annuities versus fixed annuities:

                    Fixed Annuity                     Variable Annuity
Fixed-rate of interest, unbothered by market fluctuations.The interest rate varies depending on the market conditions.
Low risk as the interest rate stays fixed throughout the tenure.High risk and potential for loss as returns depend on market sentiments. 
Moderate return as the interest rate is fixed throughout the tenure. Potential for higher gains
Low maintenance charges Higher maintenance charges 
Prone to inflation risk Can beat inflation risk 

Also Read: Personal Loan for CIBIL Defaulter: Ways to Get Loan for CIBIL Defaulters

Things to Consider Before Investing in Fixed Annuity

You will not lose your investment capital with a fixed interest rate. But, like any other investment option, fixed annuities also have their drawbacks. Hence, before you choose a fixed annuity plan to invest in, make sure you consider the following aspects:

  • Inability to Beat Inflation: As the interest rate is fixed, it stays untouched by market ups & downs; however, on the negative side, it also loses any chance of generating capital gains, and the returns may not be able to beat inflation in the long run. 
  • Higher Fees: With fixed annuities, you may have to add riders or add-ons to increase the benefits of the insurance plans, which will increase your overall charges. 
  • Penalties: As fixed annuities invest for a predetermined guaranteed period, you will have to pay a fine if you want to withdraw before the maturity period. 

Also Read: Types of Annuities | Understanding the Different Categories

Final Word 

When it comes to planning for your retirement or making a significant investment plan, you should consider checking multiple factors such as your age, financial goals, other assets and liabilities. Fixed annuities can be an ideal investment option for you if you assess all the parameters of your requirements effectively. 

Frequently Asked Questions 

What are the fees and charges associated with fixed annuities? 

Fixed annuities have lower fees & charges associated with them when compared to other types of annuities. Generally, there are commissions, transfer fees, underwriting charges and operational fees.

Is there any chance of losing money with fixed annuity plans?

There are very low chances of losing money with fixed annuity plans as market fluctuations do not affect your return on investment, but pre-withdrawal may result in considerable penalties. 

How is the rate of interest determined for fixed annuity plans? 

When deciding the interest rate for fixed annuity plans, the insurance provider takes a few factors into consideration. These factors can be the annuitant’s age, gender, life expectancy, market interest rates, and premium payable. 

Can I avoid paying taxes on my annuity? 

Investments made in annuity plans are tax-deferred, which means that you do not have to pay any taxes on the returns generated by your investment amount as long as you don’t withdraw it. However, you will have to pay taxes once you withdraw a lump sum amount or start getting periodic payments. But, the lump sum amount paid towards an immediate annuity plan is eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80CCC of the Income Tax Act. 

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Krishna Deshmukh

Investment Principal
Krishna is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.E. (Hons) in Computer Science Engineering from BITS Pilani and MBA (Finance) from JBIMS, Mumbai. He is currently working as Investments Principal at Wint Wealth. Previously he worked at Kotak Mahindra Bank at their DCM desk and Northern Arc Capital at their Structured Finance desk.

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