Fixed Annuities

A fixed annuity is a contract between you and an insurance company, where the insurer guarantees a specific interest rate on your payouts. In contrast, a variable annuity’s rate can fluctuate because it’s tied to the stock market. Fixed annuities are a common part of retirement planning.

Rachel Christian, writer and researcher for RetireGuide
  • Written by
    Rachel Christian

    Rachel Christian

    Financial Writer and Certified Educator in Personal Finance

    Rachel Christian is a writer and researcher for RetireGuide. She covers annuities, Medicare, life insurance and other important retirement topics. Rachel is a member of the Association for Financial Counseling & Planning Education.

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    Matt Mauney
    Matt Mauney, Senior Editor for RetireGuide

    Matt Mauney

    Financial Editor

    Matt Mauney is an award-winning journalist, editor, writer and content strategist with more than 15 years of professional experience working for nationally recognized newspapers and digital brands. He has contributed content for,, The Hill and the American Cancer Society, and he was part of the Orlando Sentinel digital staff that was named a Pulitzer Prize finalist in 2017.

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    Toby Walters, CFA®
    Toby Walters, CFA

    Toby Walters, CFA®

    Chartered Financial Analyst and Paraplanner

    Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.

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  • Published: May 21, 2020
  • Updated: June 24, 2023
  • 5 min read time
  • This page features 4 Cited Research Articles
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A qualified expert reviewed the content on this page to ensure it is factually accurate, meets current industry standards and helps readers achieve a better understanding of retirement topics.

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APA Christian, R. (2023, June 24). Fixed Annuities. Retrieved July 15, 2024, from

MLA Christian, Rachel. "Fixed Annuities.", 24 Jun 2023,

Chicago Christian, Rachel. "Fixed Annuities." Last modified June 24, 2023.

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Basics of Fixed Annuities

A fixed annuity is a straightforward, low-risk way to help guarantee income in retirement.

Unlike variable annuities, fixed annuities offer predictable, set payouts with lower fees.

Variable annuities, in contrast, carry a higher risk because returns are tied to the performance of underlying investments.

Similarly, indexed annuities are linked to the performance of an index, such as the S&P 500.

Fixed annuity income can be immediate or deferred:
  • Immediate fixed annuities begin paying out within a year of signing your contract.
  • Deferred annuity payments may begin years in the future, such as during retirement.
Josh Curtis | 0:38 How can an annuity offer higher interest rates than a bank?
How can an annuity offer higher interest rates than a bank? - Featuring Josh Curtis
Our financial experts will help you find an annuity tailored to your needs.
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Find out how a fixed annuity can offer you higher interest rates than a bank, courtesy of Josh Curtis, founder and lead investment advisor of Clarity Financial LLC.

How Does a Fixed Annuity Work?

You can purchase a fixed annuity from an insurance company with either a single lump sum or a series of payments.

In return, the insurer guarantees that your deposit will earn a fixed annuity rate.

According to the Financial Industry Regulatory Authority, interest rates are often fixed for a certain number of years and then change periodically based on current rates. Your contract will specify these details.

A fixed annuity guaranteed minimum interest rate is usually between 1 percent and 2 percent.

The best fixed annuity rates are above 2 percent. Insurance companies may pay a higher interest rate than the guaranteed interest rate.

Annuities are a popular retirement savings vehicle because money inside the account grows tax-deferred during a period known as the accumulation phase. Annuities enjoy similar tax treatment as traditional 401(k) plans or IRAs.

When your annuity payouts begin, the money you receive is taxed at your regular income tax rate.

Annuity contracts are customizable. Payouts from your fixed annuity can be guaranteed for the rest of your life or for a specific number of years.


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Benefits of a Fixed Annuity

Every investment comes with benefits and disadvantages. It’s important to understand both.

Weigh the pros and cons of fixed annuities before making a decision.

Pros of Fixed Annuities
Predictable Returns
Experts consider fixed annuities to be the simplest annuity type. Unlike variable and indexed annuities, returns aren’t tied to the performance of underlying stock market investments. All the details are spelled out in your contract, so you know what to expect.
Lower Risk
No investment is 100 percent risk-free. But fixed annuities do offer greater peace of mind than other options. Your money isn’t dependent on the performance of stocks or other investments. You are shielded from market crashes and other instability. This is especially important during retirement when most people can’t afford to take major risks.
Tax-Deferred Growth
All annuity earnings grow and compound on a tax-deferred basis. You will only be taxed when you withdraw money from the account or begin receiving regular payouts. These are the same tax perks enjoyed by other retirement savings vehicles, such as traditional IRAs.
Guaranteed Income Payments
The insurance company is required to honor any guarantees or promises outlined in your contract. If you sign up for lifetime payments, the insurer must deliver.

Disadvantages of a Fixed Annuity

Fixed annuities offer attractive perks, but they aren’t perfect for everyone.

For example, annuities are considered illiquid, which makes it difficult to tap into your money quickly in an emergency without facing significant fees and penalties.

It’s also difficult to withdraw all your money if you change your mind after signing the contract.

Fixed annuities earn relatively low returns. Some fixed annuity rates are comparable with a certificate of deposit, or CD, purchased from a bank or credit union.

Because growth is fixed at a low rate, your earnings may not keep up with inflation.

Other Drawbacks of Fixed Annuities
  • Withdrawing more than 10 percent of your account during the accumulation phase may result in surrender charges.
  • Withdrawing any money before the age of 59.5 may result in a 10 percent IRS penalty.
  • Your annuity guarantee is only as strong as the insurance company that issues it. These products are not backed by a bank, so if the insurer goes belly up, your annuity is at risk.
  • No cost of living adjustments to hedge against inflation unless purchased with a rider.
  • Relatively low growth potential compared to other investment options.
Last Modified: June 24, 2023

4 Cited Research Articles

  1. Texas Department of Insurance. (2020, March 4). Understanding Annuities. Retrieved from
  2. National Association of Insurance Commissioners. (2019). 10 Things You Should Know About Buying Fixed Deferred Annuities. Retrieved from
  3. Financial Industry Regulatory Authority. (n.d.). Fixed Annuities. Retrieved from
  4. U.S. Securities and Exchange Commission. (n.d). Annuities. Retrieved from