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Fixed annuities are essentially CD-like investments issued by insurance companies. Similar to CDs, they pay guaranteed rates of interest, often higher than bank CDs while your principal investment is guaranteed. The fixed annuity is a type of annuity contract that allows for the accumulation of capital on a tax-deferred basis with the freedom to designate beneficiaries who receive funds at your passing. Fixed annuities are valuable tools to help manage volatility, taxes and estate issues.
Fixed annuities are the main way of turning a pot of cash into an income stream. In very simple terms, they work like a life insurance policy in reverse–you pay them a lump sum up front, then they pay you regularly until you die.
There are two specific types of risk with fixed annuities. The first is the risk that you die early and, thus, don’t receive as much money back as you paid up front.
The second risk only applies to some forms of fixed annuities. You can get fixed annuities that pay a fixed amount, often based on factors such as your age, gender and health status when you buy the fixed annuity. However, you can also get variable fixed annuities in which the insurer invests the money, meaning the amount you receive depends on the performance of the investments. To mitigate this risk, you can opt for the middle-ground of an index-linked fixed annuity.
Whether fixed annuities are right for you and what level of risk is appropriate will depend on your financial circumstances. You’ll also need to carefully consider the tax implications, particularly if you want to retire early.
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