What a fixed annuity guarantees, and what it doesn’t

An annuity is a contract with an insurance company. You give it a sum of money, and in return it guarantees growth, income, or both. Fixed annuities are the most straightforward kind.

What’s guaranteed

• Your principal doesn’t go down because the stock market does.
• A fixed annuity credits a set interest rate for a set number of years, a bit like a CD issued by an insurance company.
• If you turn the annuity into income, that payment can be guaranteed for the rest of your life.

These guarantees are backed by the financial strength and claims-paying ability of the insurance company that issues the annuity, which is one reason we look closely at who that company is.

What isn’t guaranteed, or has limits

• Getting your money out early. Most annuities have surrender charges for the first several years if you withdraw more than the free amount, which is commonly around 10% a year.
• Index gains. A fixed indexed annuity credits interest based on a market index, with a floor of 0% so you don’t lose to a down market, but caps or participation rates limit how much of the upside you get.
• Taxes. Growth is tax-deferred, but withdrawals are taxed as income, and taking money out before age 59½ can mean an extra 10% IRS penalty.

Who it tends to fit

People near or in retirement who want part of their savings protected from market drops, or who want a paycheck they can’t outlive on top of Social Security. It usually isn’t the right home for money you may need in the next few years.