Fixed Interest Paying Annuities
There are two main types of fixed interest annuities: immediate and deferred.
Immediate
With this type of annuity you permanently swap a premium for a fixed and guaranteed stream of income, either for life, or a predetermined period of time.
With this type of annuity it is important to remember that the amount of income received each year never goes up, while inflation rates remain subject to change. In practice this usually means that the annuity holders ability to purchase will gradually decrease over time as their income falls behind increasing rates of inflation. Put simply the buying value of a dollar will not be the same 10 years from now.
When selecting an immediate annuity factos such as age and current interest rates will determine the levelof income recieved per dollar swapped. Younger clients are likely to live longer and receive more money over time. As a result they are usually recieve less desirable amounts of income.
Income received from an immediate annuity is part return of principal, which is not taxable, and part interest, which is subject to income taxes.
Before this become a viable alternative the following needs to be in place: the client must be of sufficiently advanced age, the current interest rates must be high, and the client must have no desire to leave the primary deposit money to family, friends, or loved ones.
Here at Retirement Council of America we recognize that it is necessary to tailor our services to the unique needs and expectations of our clients. For some of our clients immediate annuities can represent a desirable option.
Deferred
Deferred annuities build interest upon deposits, which grow tax deffered and can be accessed at a later date.
There are many deferred annuities on the market that should be avoided. These typically attract people with a high interest rates of 10-14% for the first year. In order to get these rates customers must lock themselves into a 10-15 year plan with a low interest rate of 3-5% that never increases. Getting a very brief high interest rate for one year in exchange for many years of low rates rarely leads to overall profitability and may, for many clients, be viewed as a restrictive and undesirable option. Buyers of this type of annuity often sacrifice future profit for temporary short term gains, and these gains are typically re-captured by the insurance companies if you surrender your annuity to try to take advantage of higher rates elsewhere.
Despite a number of potential limiting factors, there are times when this type of annuity can be benefical. Here at Retirement Council of America we can help determine which deferred fixed interest paying annuities are right for you.