Fixed annuities are long term investment products underwritten by insurance companies. There are two types of fixed annuities; the single premium annuity, which is for lump sum investments, and the premium annuity, which allows multiple contributions in the investment. A fixed annuity works a little bit like a bank certificate of deposit with the added advantage of tax deferred earnings. Like a CD, each investment is given an initial earning rate which is guaranteed for a set period of time, typically a year. On the anniversary of the investment, a new rate is assigned based on the economic conditions at the time. The interest earnings on fixed annuities are tax deferred until you withdraw them and then are subject to normal taxes. In addition, a ten percent excise tax penalty will also be assessed if you withdraw the money below age fifty-nine and one-half. There are no initial or annual fees assessed for investing in an annuity. Like CD's, early withdrawal or surrender charges will be assessed for withdrawals that take place within a period specified in the contract. This period typically lasts from five to seven years. The amount of the penalty declines over time. Most annuities will not invade the principal value of the contract to collect the surrender charge. Most annuities allow annual withdrawals of 10% of the account value without incurring surrender charges. For more information, contact a financial advisor.
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