Annuity rates go up and down as they are influenced by other rates such as mortgage rates and treasury bill rates. But the redeeming feature is that when interest rates decline, the rates earned on a fixed annuity company be lot more desirable than any other returns made available from fixed investments. Typically, the rate offered by most any annuity company will beat bank CDs of the same maturity by 1 to 2%. Fixed annuities have some other distinct advantages:
- While the typical fixed annuity will have a different interest rate each year, those who want greater certainty can select and annuity company that guarantees a fixed return throughout the tenure of the contract. As an example, if you opt for MYGA (a multi-year guarantee annuity) that locks in the current interest rate for a period of five years, it is going to get you a known rate for the entire 5 years. After the end of the contract years, you will receive the minimum rate, irrespective of market conditions and will have the flexibility to renew with that annuity company for another five years or move your funds to another annuity company.
- Yet another benefit of dealing with an annuity company is that all annuities are tax-deferred. In other words, the interest income on the annuity's principal amount will compound without the liability for current taxes. This is unlike other fixed income investments including certificates of deposit that are taxed as you earn interest, whether withdrawn or not. This feature lessens the actual rate of financial return on most fixed income investments.
- You may find an annuity companythat entices you with interest bonuses during the first year. This kind of additional income could nicely inflate the particular yield over the contract time period. But premature withdrawals from bonus rate annuities could mean surrender costs that will negate the interest benefit. Again, annuities that involve bonuses may carry larger charges and extended surrender times when compared with annuities that are without a benefit. So do a thorough investigation of bonus annuities pros and cons.
If you so choose, you can defer withdrawing money out of your annuity and hence delay income tax payment. You can even change your payments to make them belong to periods when you will be in a lower tax bracket. You may be able, if you desire, to delay receiving payments from annuities for life and generate more resources for your heirs. Of course, the inheritors will remit income tax as per his or her respective tax bracket. You certainly can't do this type of retirement planning with other fixed income investments.
Have caution if an annuity company offers inordinately high rates as compared to other annuity companies. Obviously if an annuity company pays abnormally high rates, it is in dire necessity of funds and things are not in good financial order. It will be prudent to find out the particular financial rating of any annuity company prior to proceeding and the insurance agent or financial advisor would willingly get that for you.
It is essential that you select an annuity company that is financially dependable and not be driven by the impulse towards a company which offers higher annuity rates. Annuity advantages and guarantees associated with an insurance company are dependent on its solvency and to be able to promptly settle claims. It is usually worthwhile to be aware that annuity surrender charges (like early withdrawal penalties) can be reviewed before you become committed to the annuity (read the annuity contract before you invest).