A fixed annuity is a type of insurance contract that promises to pay the buyer a specific, guaranteed interest rate on their contributions to the account. By contrast, a variable annuity pays interest that can fluctuate based on the performance of an investment portfolio chosen by the account’s owner. Fixed annuities are often used in retirement planning.

When the annuity owner, or annuitant, elects to begin receiving regular income from the annuity, the insurance company calculates those payments based on the amount of money in the account, the owner’s age, how long the payments are to continue, and other factors. This begins the payout phase. The payout phase may continue for a specified number of years or for the rest of the owner’s life.

During the accumulation phase, the account grows tax-deferred. When the owner begins receiving income, that money is taxed at their regular income tax rate. Annuity owners may also be allowed to make a limited number of withdrawals from the account before the payout phase begins.

Benefits of a Fixed Annuity
Predictable Investment Returns
The rates on fixed annuities are derived from the yield that the life insurance company generates from its investment portfolio, which is invested primarily in high-quality corporate and government bonds. The insurance company is then responsible for paying whatever rate it has promised in the annuity contract. This contrasts with variable annuities, where the annuity owner chooses the underlying investments and therefore assumes much of the investment risk.