A fixed annuity, in comparison to its counterpart, the variable annuity, has its own set of advantages and disadvantages. The fixed annuities pros and cons carry a weight that is for you to decide and are totally dependent upon your personal situation.
Please read below regarding the financial contributions and detractions to determine whether or not an immediate or deferred fixed annuity is most beneficial for you.
Fixed Annuity Advantages
The most obvious benefit of a fixed annuity, although some could consider it a disadvantage as well, is that it is capable of guaranteeing a certain interest rate. With fixed rates of interest, an investor can relax and not concern himself or herself with the rollercoaster experience of the stock market.
While this interest rate guarantee is great, another advantage that makes the fixed annuity amazing is the lower minimums of investment. One thousand to up to ten thousand dollars can get you in, which is far more reasonable for most people looking to earn some cash from their investments with lesser capital.
The final advantage is that the earnings of the fixed annuity escape taxation up until the time when you decide to close or withdraw. Taxes, if following the expected trend, will have increased by then surely, but you will continue to earn interest on the interest already earned without paying taxes first! So your amount of money to compound is much higher including taxes instead of excluding them.
Fixed Annuity Disadvantages
The fixed annuity is not the catch-all, glorious investment, because there are some disadvantages all investors should be aware of before jumping headfirst into this type of annuity.
Although it is called a fixed annuity, there are some cases where the interest rate is only fixed and guaranteed for, perhaps, only the first year. This limited time period of guarantee can sour the deal, so make sure you know what your terms are.
Another issue related to this type of annuity is that of the penalty. If you find yourself locked into an annuity that was meant to be fixed but the rates change after a certain period, then you may wish to withdraw your investment and earnings earlier than expected. Expect to pay a very hefty surrender charge for this, which can easily negate any earnings you accumulated.
The most crucial problem with this investment, if you have covered your bases with the rest of the terms of agreement, is that you will likely start this investment young and hope to stay in it for decades. Your payments can be expected to not rise enough to keep pace with the rising inflation costs. This means the payments that you collect in your older age will actually have less purchasing power as time continues as well.
Pros and Cons of Fixed Annuities
Be careful in all things, especially investments of any kind. Make sure you understand what it is you are purchasing. Do not blindly trust anyone. Do your research to ensure you are enabling yourself to increase your net worth over time. Don’t fall victim to hidden fees or charges. Know all of the fixed annuities pros and cons.