Fixed Annuities
Of all the annuity types, fixed annuities are the easiest to understand — and that simplicity is a genuine virtue when you’re making a decision that affects your retirement income for decades.
A fixed annuity is a contract with an insurance company. You deposit a lump sum, and the insurer guarantees a specific interest rate for a set number of years. At the end of that term, you can withdraw, renew, or roll the money into a new contract. Your principal doesn’t fluctuate. The interest rate doesn’t change. There are no surprise fees eating into your balance.
Think of it as the insurance world’s version of a CD, but typically with a higher rate and one important added benefit: the growth is tax-deferred. With a bank CD in a regular taxable account, the IRS wants its cut every year whether you withdrew the interest or not. With a fixed annuity, you don’t pay taxes on the earnings until you actually take money out — which lets your money compound on a larger base.
What to Understand Before You Commit
Fixed annuities are not liquid. Most contracts include surrender charges — penalties for withdrawing more than the free-withdrawal allowance (typically 10% per year) before the surrender period ends. Surrender periods commonly run 3 to 7 years, sometimes longer. This isn’t necessarily a problem — it’s a design feature that allows carriers to offer better rates — but it means fixed annuity money should only come from savings you genuinely won’t need to access during that window.
The credited interest rate also resets at renewal. The rate you earn in year one might not be the rate available when your term ends. This is worth planning around, especially if you’re relying on a specific yield for income projections.
Who Fixed Annuities Work Well For
A retired couple with $120,000 sitting in a low-yield savings account they don’t intend to touch for five years is a classic fixed annuity candidate. The money isn’t working hard enough where it sits, they need growth without market risk, and the guaranteed rate a MYGA or fixed annuity offers meaningfully outpaces what most banks are paying on comparable accounts. The discipline of the surrender period actually works in their favor — it keeps them from impulsive decisions during volatile markets.
Fixed Annuities: Frequently Asked Questions
Prioritize the following: (1) financial strength rating from AM Best (look for A or higher), (2) guaranteed interest rate and whether it is locked for the full term or just the first year, (3) surrender period length and penalty schedule, (4) free-withdrawal allowance per year, (5) renewal rate history and how the carrier has treated renewals in the past, (6) any fees including administrative charges or optional rider costs, and (7) the quality of customer service and the claims payment track record.
Fixed annuities in their base form are accumulation products — they grow your money, but do not automatically generate income payments. However, you can convert a fixed annuity into an income stream at maturity by annuitizing the contract or by rolling it into an income annuity. If your primary goal is guaranteed lifetime income now, explore income annuities and guaranteed lifetime income strategies, which are specifically designed for that purpose.
Fixed annuities can be an excellent tool for retirees who have a block of savings they don’t need immediate access to and want guaranteed growth without market risk. They work best as part of a diversified retirement income strategy — not as a standalone solution. They are particularly well-suited for money sitting in low-yield savings accounts or maturing CDs that the owner wants to reposition into a higher guaranteed rate without taking on investment risk.
Both fixed annuities and bank CDs offer principal protection and a guaranteed interest rate for a set term. Key differences: fixed annuities grow tax-deferred (CDs are taxed annually on interest earned), fixed annuities are not FDIC insured (CDs are), and fixed annuities often offer higher rates for comparable terms. Fixed annuities pass to beneficiaries outside of probate; CDs typically do not. Both carry early-withdrawal penalties, though the mechanics differ.
Surrender charges are penalties assessed when you withdraw more than the free-withdrawal allowance (typically 10% of contract value per year) before the surrender period ends. Surrender periods commonly run 3 to 7 years. The charge percentage typically declines each year — for example, 7%, 6%, 5%, 4%, 3%, 2%, 1% — and then reaches zero at the end of the term. These charges exist because they allow carriers to invest your premium in longer-duration assets, which is what enables them to offer higher guaranteed rates.
You cannot lose principal due to market fluctuations — that is a defining feature of fixed annuities. However, there are two scenarios where you could receive less than expected: (1) withdrawing more than the free-withdrawal allowance during the surrender period triggers surrender charges that reduce your balance, and (2) in the unlikely event of insurer insolvency, state guaranty associations provide limited coverage that may not cover the full contract value.
At the end of the contract term, you typically have three options: (1) withdraw the full value without surrender charges, (2) renew the contract at the then-current interest rate for a new term, or (3) perform a 1035 exchange into a new annuity contract to continue tax-deferred growth. Most insurers provide advance notice of maturity and the renewal rate so you can make an informed decision.
Growth inside a fixed annuity is tax-deferred — you do not owe taxes on credited interest until you make withdrawals. When you do withdraw, earnings are taxed as ordinary income, not at capital gains rates. If you withdraw before age 59½, the IRS may assess a 10% early-withdrawal penalty on the earnings portion. Annuities held inside qualified retirement accounts (IRA, 401k) do not provide an additional tax deferral benefit.
No. Fixed annuities are insurance products, not bank deposits, so they are not covered by FDIC insurance. However, most states have guaranty associations that provide a layer of protection — typically up to $250,000 per insurer — in the event a carrier becomes insolvent. Coverage limits and rules vary by state. Choosing a highly rated carrier (AM Best A or better) is the primary protection strategy.
Fixed annuities are among the more conservative financial products available for retirement savers. Your principal is contractually protected and does not fluctuate with market conditions. They are backed by the financial strength of the issuing insurance company and, in most states, by state guaranty associations up to specified limits. They are not FDIC insured, so evaluating carrier financial strength ratings (AM Best, S&P) before purchasing is important.