What Is a Fixed Annuity?
A fixed annuity is an insurance contract designed to provide predictable interest crediting and, depending on the contract, potential income features. Unlike variable annuities, traditional fixed annuities generally do not directly expose contract value to stock-market investment losses.
How a fixed annuity works
The owner deposits money with an insurance company in exchange for an annuity contract.
The insurer generally credits interest according to the contract's stated rate structure.
Depending on the product, the rate may be guaranteed for a specific period and later reset according to contract terms.
Earnings generally accumulate tax deferred until taxable distributions are taken.
What is a MYGA?
A Multi-Year Guaranteed Annuity — commonly called a MYGA — is a type of fixed annuity that generally guarantees an interest rate for a specified number of years.
Common guarantee periods may include several years, although actual durations and rates vary among insurers and over time.
Example concept
A MYGA might guarantee a stated interest rate for a defined contract period.
If the owner keeps the contract through the applicable period and follows the contract rules, interest is credited according to those terms.
This is different from a variable annuity or managed investment account, where account value can fluctuate directly with market investments.
Potential advantages of fixed annuities
Predictability
Interest-crediting terms are generally established contractually rather than being directly determined by daily market fluctuations.
Principal Protection
Traditional fixed annuities generally provide contractual protection of principal from direct stock-market losses, subject to withdrawals, surrender provisions and insurer claims-paying ability.
Tax Deferral
Earnings in a nonqualified deferred annuity generally grow tax deferred until taxable amounts are distributed.
Income Options
Depending on the contract, annuitization or other income options may be available.
Do fixed annuities have fees?
Fee structures vary by contract.
Some traditional fixed annuities and MYGAs may have no explicit annual base-contract fee.
That does not mean the contract has no restrictions or economic tradeoffs.
Potential considerations can include:
- Surrender charges
- Withdrawal limitations
- Market value adjustments where applicable
- Optional rider charges
- Renewal-rate uncertainty after the guaranteed period
Read more in the Annuity Fees & Costs Guide .
Surrender periods and liquidity
Fixed annuities are generally intended as long-term financial products.
Many contracts contain a surrender schedule. If the owner withdraws more than the amount permitted under the contract during that period, a surrender charge may apply.
Some contracts allow a specified percentage of the contract value to be withdrawn annually without a surrender charge.
The exact percentage, calculation method and availability vary by contract.
What is a Market Value Adjustment?
Some fixed annuity contracts include a Market Value Adjustment, often abbreviated MVA.
An MVA may increase or decrease the amount received when certain withdrawals or surrenders occur during the applicable contract period.
The adjustment generally reflects changes in interest-rate conditions according to the formula specified in the contract.
Not every fixed annuity has an MVA.
What happens when the guaranteed rate period ends?
Contract treatment varies.
Depending on the product, the owner may have options such as:
- Continuing under a renewal rate
- Beginning another guarantee period
- Taking permitted distributions
- Surrendering the contract under applicable terms
- Exchanging the annuity when appropriate
Renewal rates may differ from the rate originally credited.
Fixed annuity vs. CD
| Feature | Fixed Annuity | Bank CD |
|---|---|---|
| Issuer | Insurance company | Bank or credit union |
| Federal income tax on interest | Generally deferred while earnings remain inside a nonqualified deferred annuity | Interest is generally taxable as credited or received, subject to applicable tax rules |
| FDIC insurance | No | May apply to eligible bank deposits within applicable limits |
| Insurance-company guarantee | Yes, subject to contract and insurer claims-paying ability | Not applicable in the same manner |
| Early-access restrictions | May include surrender charges | May include early-withdrawal penalties |
| Income options | May provide annuity-income options | Generally not an insurance income contract |
Fixed annuity vs. fixed indexed annuity
| Feature | Traditional Fixed Annuity | Fixed Indexed Annuity |
|---|---|---|
| Interest crediting | Generally based on declared or guaranteed rates | Based partly on an index-linked crediting formula |
| Direct stock-market investment | No | No |
| Potential credited interest | More predictable | May vary with index performance and crediting terms |
| Caps or participation rates | Generally not used in the same manner | May apply |
| Principal protection | Contractual, subject to contract terms | Contractual, subject to contract terms |
Learn more about Fixed Indexed Annuities .
Tax treatment
Earnings in a nonqualified fixed annuity generally accumulate tax deferred.
Taxable distributed earnings generally are treated as ordinary income rather than capital gains.
Different rules apply to annuities held inside IRAs or other qualified retirement accounts.
Learn more in How Are Annuities Taxed? .
Potential disadvantages and risks
- Surrender periods can reduce liquidity
- Withdrawals above permitted amounts may trigger surrender charges
- Some contracts contain Market Value Adjustments
- Renewal rates can change after the initial guarantee period
- Inflation can reduce the purchasing power of fixed returns
- Taxable gains generally receive ordinary-income treatment
- Guarantees depend on the issuing insurer
Who might consider a fixed annuity?
Depending on individual circumstances, a fixed annuity may be considered by someone who places a high priority on:
- Predictable interest crediting
- Protection from direct stock-market losses
- Tax-deferred accumulation
- A defined investment horizon
- Potential future income options
It may be less appropriate for someone who requires substantial immediate liquidity or seeks unrestricted stock-market upside.
Fixed annuities for firefighters and first responders
Firefighters and other public employees approaching retirement may already have several income and investment resources.
These can include:
- Pension income
- DROP proceeds
- Governmental 457(b) accounts
- IRAs
- Roth accounts
- Taxable investments
- Social Security
A fixed annuity should be evaluated in the context of the entire retirement plan rather than simply because it offers a stated interest rate.
Liquidity, existing pension income, taxes, inflation and long-term growth needs all deserve consideration.
Frequently asked questions
Can I lose money in a traditional fixed annuity?
Traditional fixed annuities generally provide contractual principal and interest guarantees, but withdrawals, surrender charges, market value adjustments where applicable and insurer credit risk can affect the amount received.
Are MYGA rates permanent?
No. The stated rate generally applies for the specified guarantee period. What happens afterward depends on the contract.
Are fixed annuities FDIC insured?
No. An annuity is an insurance contract, not an FDIC-insured bank deposit.
Do fixed annuities have annual fees?
Some fixed annuities may have no explicit annual base-contract fee, but surrender provisions, optional charges and other contract terms may still affect the economics of the product.
This material is provided for general educational and informational purposes only and is not intended as individualized investment, insurance, tax or legal advice.
Fixed annuity rates, surrender schedules, withdrawal provisions, guarantees, optional benefits and contract features vary among insurance companies and products.
Insurance guarantees are subject to the claims-paying ability of the issuing insurance company.
Tax treatment depends on individual circumstances and applicable federal and state law. Consult an appropriate tax professional regarding individual tax matters.