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Why Annuity Rates are Better than Other Fixed Income Rates

Posted on September 8, 2011 by bobrichards

Annuity rates tend to be higher than other fixed income investment of similar maturity and risk.  Let's look at the reasons why and what other advantages annuity interest may offer over other types of interest.

The fixed annuities have specific distinct advantages:

• Annuity contracts guarantee minimum annuity rates throughout the tenure of the contract. As an example, if you opt for MYGA (a multi-year assure annuity) that locks in the predominant interest rate for a period of five years, it is going to provide you that fixed annuity rate for the whole contract period. Eve with a traditional fixed annuity, which has a rate that changes annually, there will typically be minimum guaranteed annuity rates, such as 2.5%.

• Yet another benefit may be that annuity rates are tax-deferred. In other words, the interest income on the annuity's principal amount will compound without the liability for current taxes. This is unlike other fixed income investments including bank certificates of depots, treasury bonds or corporate bonds. The income on these instruments are taxed as you earn your interest, whether you withdraw it or not.  This particular feature lessens the actual rate of return on your fixed interest investments relative to the tax-advantaged annuity rates offered by annuities.

• You must be aware that the annuity rates of some annuity companies are inflated by first year bonuses. This kind of additional income could nice inflate the particular yield over the contract period of time. But premature withdrawals from these bonus annuities could mean surrender costs that will wipe out the bonus. Again, annuities that involve bonuses may carry increased charges and extended surrender charge periods when compared with annuities that are without any extra annuity rate enticement. This is to say, any boost in annuity rates will often have a nullifying feature and in this situation, it is typically an extended surrender charge period. As a result, you will be forced to keep the annuity for the entire term or pay dearly.

If you so choose, you can even defer distributing money from your annuity and as a result delay income tax payment. You can even time your payments to make them fit with period when your marginal tax rate is lower. You certainly can't do this type of tax planning with other fixed income opportunities.  Note also that when this interest is deferred, it may have additional benefits for retirees such as:

  • reduced tax on social security benefits
  • allow for a higher deduction for medical expenses

It is essential that you select an annuity company that is financially secure and not be driven by the attraction of a company that gives higher annuity rates. Annuity advantages and guarantees of the insurance company are dependent on its solvency and the capacity to promptly settle claims. It is usually worthwhile to be aware that annuity surrender charges are are disclosed in the annuity contract and known to you before you invest and these charges differ from one company to another. You can seek advice from either an independent insurance adviser or a competent finance expert before exercising your investment choices in search of attractive annuity rates.

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    Filed Under: Annuities for Income

    About bobrichards

    Bob Richards
    Editor | Involved in Various Marketing Positions within the Financial Services Industry

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