Fixed Annuity Payments: Understanding The Basics

Markets today are flooded with variety of investment options. This further adds to the confusion of the consumers who have problem of choosing amongst various options available. Amongst different investment products available, there are further sub-varieties. Annuity is one such investment product that guarantees certain amount of return over the life of the investor, or after his death to other nominated beneficiaries.

Annuities also come in different form and types. The two major types of annuity products are Fixed Annuity and Variable Annuity.

Fixed annuity is a popular form of annuity product that again comes in two main types: one that provides deferred pay out to investors and other one that provides immediate payouts. Thus, to choose amongst various options, an investor should first gain proper education on each of these available products.

Type of fixed annuity payments

Immediate payout fixed annuity provides an amount right at the inception of the annuity scheme. On the other hand, deferred payouts tend to pay at a later pre-determined date.

Similarity with Certificates of deposits (CDs)

Like certificate of deposits, fixed annuities provide safety of the investments and carry low risk providing limited return. Thus, the annuity-holder can be assured of regular flow of income, at times, even for a lifetime. However, apart from this inherent quality, both the instruments are quite different from one another.

Associated characteristics of Fixed Annuity Plans

• Fixed annuity plans offer fixed rate of return to the annuity holder. This is the most important factor that you should bear in mind while choosing this particular annuity product. The interest rates depend upon the market condition prevailing during the time of striking the contract and the time to maturity.

• The interest rates offered by fixed annuities are higher than the rates offered by CDs. The difference is essentially because of the longer time to maturity in case of annuities. Thus, yield to maturity is higher with fixed annuity plans.

• Liquidity is another aspect that you should study. CDs provide limited liquidity to the extent that the entire amount invested is locked up for one year. Pre-maturity withdrawal of any amount would attract penalties. Fixed annuity provide some flexibility as you can withdraw up to 10% of the purchase price annually, without calling for any interest cost or penalty. However, you can not withdraw the entire amount over the surrender period (time till the annuity matures).

• Taxation policies are also different for fixed annuity plans and CDs. Tax deferred fixed annuity plans charge tax only upon withdrawal. Thus, you can do some tax planning at your end and can let your money grow.

Source by Herman White

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