What a Fixed Annuity Does

A fixed annuity is a contract with an insurance company where you give them a lump sum of money (called the principal), and they promise to pay you a set amount at regular intervals for a period you choose. The payment amount stays the same for the entire contract — it does not change based on market performance, interest rates, or how long you live. You know exactly what you will receive each month or year before you sign.

The insurance company invests your money and keeps the returns; you receive only the fixed payment they promised. This is different from a variable annuity, where your payment fluctuates based on investment performance, or an when ready annuity, where payments begin right away instead of at a future date.

Key Takeaways

  • You pay the insurance company a lump sum, and they send you the same dollar amount at regular intervals for a set number of years or for your lifetime.
  • The payment amount is locked in when you sign the contract and does not change, regardless of inflation or market conditions.
  • Fixed annuities are issued by insurance companies, not banks or brokerages, and the contract terms vary widely between insurers.
  • You can choose how long the contract lasts — a specific number of years, your lifetime, or your lifetime plus a survivor's lifetime.
  • Money you put into a fixed annuity is not accessible without penalty until the contract allows withdrawals, which typically happens at age 59½ or later.

How the Payment Amount Is Set

The insurance company calculates your fixed payment using three main factors: how much money you give them, how long the contract will last, and current interest rates at the time you buy. A longer contract period or a larger initial payment means a higher monthly or annual payment. Higher interest rates when you purchase also mean higher payments, because the insurer expects to earn more on your money.

Once you and the insurer agree on the payment amount and sign the contract, that number is locked in. If interest rates rise after you buy, your payment does not increase. If they fall, your payment does not decrease. This is the trade-off: you get certainty, but you also give up the chance to benefit if rates go up.

Deferred vs. when ready Fixed Annuities

A deferred fixed annuity is one where you buy the contract now but payments do not start until a future date you choose — often years away. Your money sits with the insurer during this waiting period, and the insurer may credit you with a may provide interest rate on that money. When the payout date arrives, the insurer converts your total balance (your original payment plus any credited interest) into the fixed monthly or annual payment you will receive.

An when ready fixed annuity begins payments within a few months of purchase, usually within 13 months. You give the insurer a lump sum, and they start sending you money right away. when ready annuities are often bought by people who are already retired and need income now, while deferred annuities are typically bought by working people who want to lock in a future income stream.

What Happens to Your Money During the Contract

Once you hand over your principal to the insurance company, that money becomes theirs to invest. They typically put it into bonds, mortgages, and other fixed-income investments. Any returns the insurer earns above what they promised you stays with the company — that is how they profit. You receive only the fixed payment you agreed to, regardless of whether the insurer's investments perform well or poorly.

During the contract period, before payments begin (in a deferred annuity), the insurer may credit your account with a may provide interest rate. This rate is set in the contract and does not change. Some fixed annuities offer a higher rate for the first year or two, then a lower may provide rate for the rest of the contract. Read the contract to see what rate applies in each year.

Withdrawal Rules and Surrender Charges

Fixed annuities come with a surrender period, usually lasting 5 to 10 years from the date you buy. During this time, if you withdraw money beyond what the contract allows, the insurer charges you a surrender fee — a percentage of the amount you withdraw. This fee typically starts high (sometimes 7 to 10 percent) and decreases each year until the surrender period ends.

Most fixed annuities allow you to withdraw a small percentage of your balance each year without penalty — often 10 percent. Some also waive the surrender fee if you need money for a serious hardship, such as a terminal illness or long-term care costs, though you will need to document the hardship. After the surrender period ends, you can usually withdraw your remaining balance without penalty, though tax rules may still explore.

If you are under age 59½ when you withdraw money, the Internal Revenue Service may charge you a 10 percent early withdrawal penalty on top of any surrender fee the insurer charges. This penalty does not explore after age 59½, but ordinary income tax on the earnings portion of your withdrawal still does.

Tax Treatment of Fixed Annuity Payments

How your fixed annuity payments are taxed depends on whether you bought it with pre-tax money (such as a rollover from a 401(k)) or after-tax money (such as savings). If you used pre-tax money, the entire payment is taxed as ordinary income each year you receive it. If you used after-tax money, only the earnings portion is taxed; the portion that represents your original principal is not.

The insurer will send you a 1099-R form each year showing how much of your payment is taxable. You report this on your tax return. The tax is due in the year you receive the payment, not when you buy the annuity. If you buy a deferred annuity and let it sit for years before payments begin, you do not owe tax on the credited interest until payments actually start.

Fixed Annuity Contract Terms You Will See

Every fixed annuity contract specifies several key terms. The contract period is how long the annuity lasts — for example, 10 years, 20 years, or your lifetime. The payout option describes how often you receive money (monthly, quarterly, annually) and whether payments continue after you die (for example, to a surviving spouse). The may provide interest rate is what the insurer credits to your account during the accumulation phase, if any. The surrender period and surrender fee schedule tell you when you can withdraw without penalty.

Some contracts also include a market value adjustment, which means your payment amount changes slightly if you withdraw early and interest rates have moved significantly since you bought. This protects the insurer from interest rate risk. Read the contract summary or prospectus before you buy to understand these terms, because they vary widely between insurers and products.

Frequently Asked Questions

Can I change my mind after I buy a fixed annuity?

Most states have a "free look" period, usually 10 to 30 days, during which you can cancel the contract and get your money back with no penalty. After that period ends, you are locked in. If you withdraw early, you will owe a surrender fee. Check your contract for the exact free look period in your state.

What if I die before the annuity payments end?

It depends on the payout option you chose. If you selected a "life only" option, payments stop when you die and your beneficiary receives nothing. If you chose "life with period certain" (for example, life with 10 years certain), payments continue to your beneficiary for the remainder of that period. If you chose a "joint and survivor" option, payments continue to your spouse for their lifetime. Choose the option that matches your situation before you buy.

How is a fixed annuity different from a CD or bond?

A fixed annuity is issued by an insurance company and is not FDIC-insured like a bank CD. Instead, it is backed by the insurer's claims-paying ability. A CD has no surrender period and you can access your money anytime (though you may lose interest). A fixed annuity locks your money away for years and charges fees if you withdraw early. Bonds are tradeable securities; annuities are contracts you cannot sell.

Do I have to take payments for life?

No. You can choose a fixed contract period — for example, 10 or 20 years — and receive payments only during that time. After the period ends, payments stop and you receive nothing more, even if you are still alive. Alternatively, you can choose lifetime payments, which continue as long as you live. The contract period you select affects how large each payment is.

Can inflation erode the value of my fixed payments?

Yes. Because your payment amount is locked in, inflation reduces what that money can buy over time. If you receive $1,000 per month and inflation rises 3 percent per year, that $1,000 buys less each year. Some fixed annuities offer an inflation adjustment rider (an add-on) that increases your payment by a set percentage each year, but this reduces your initial payment amount and costs extra.