What Is a Fixed Rate Annuity?

A fixed rate annuity is a supplemental retirement savings investment. Insurance companies sell these investments to conservative consumers looking to get tax-deferred growth on money to use after age 59 1/2. Some fixed rate annuities are qualified retirement plans like IRAs while others are non-qualified accounts serving exclusively to supplement retirement savings.

Fixed Annuity Basics

A fixed rate annuity is a tax-deferred structure. Money is put into the account and grows tax-deferred. The account earns a fixed rate of return annually, in most cases, adjusting on the anniversary date based on existing interest rate conditions. Most fixed annuities offer a first-year bonus rate to attract customers; the bonus rate disappears on the first anniversary date. Fixed annuities often promise a minimum annual return, maybe 3 percent. Qualified plans may have contribution limits, though non-qualified plans have no limits.

Who Provides Guarantees

Fixed annuities have many promises including the annual rate of return, principal guarantee and minimum interest rate returns. There is no federal regulatory body that provides the guarantee. All fixed annuity assets are backed by the financial strength of the insurance company offering the money. The stronger the insurance company, the more secure an investor should feel about the investment. Independent rating firms, such as Fitch and Moody's, rate insurance companies. Look for top-tier companies with ratings in the "A tier" for financially sound insurance companies with a positive history of benefits payouts.

Shopping Around

Not every fixed annuity is the same. Fixed annuities have time durations, known as surrender periods, ranging from one to 15 years. The surrender period might only allow interest withdrawals, perhaps up to 10 percent of the account value without penalty. Penalties, known as surrender charges, are a percentage of the distribution value. Surrender charges drop, often 1 percent, per anniversary year until they surrender period is over. Every annuity has its own variations to these norms. Not every annuity offers a bonus or a minimum guarantee. Read all contract terms to understand how long the commitment is and what exceptions there are to waive penalties, if any. Some contracts waive penalties on death, disability or long-term care.


A fixed annuity is often compared to a bank's certificate of deposit and marketed to the same group of investors. Investors might be attracted to the initial bonus, providing a bump in income for a short period of time. Always consider the renewal history of any annuity prior to signing a contract. Realize that there is a cooling-off period, called a free look period, allowing you to review the entire contract and cancel it for no reason without penalty. Most annuity-free look periods are from 10 to 14 days, depending on state insurance regulations.