If you bought a fixed deferred annuity a few years ago, you may be looking at the end of your initial annuity rate guarantee, and the renewal annuity rates could be lower than they were when you first made the investment. Some fixed annuities leave you no option other than accepting the current one-year rate, or transferring the annuity to another one so you can lock in a new, long-term annuity rate guarantee.
However, a one-year annuity rate lock may not be such a bad idea. You could earn a reasonable return and wait until next year to see where interest rates have gone before deciding to renew for another year, or explore other options.
If your contract surrender period has ended and the renewal annuity rates are low, the annuity company might offer you a new multi-year (usually five to 10 year) annuity rate guarantee period. This could be their way of trying to keep your business rather than lose you to another insurance company. You could, however, possibly face a new round of surrender charges by doing this. (Surrender schedules and rates vary among companies.)
It might also be time to take money from your annuity through annuitization (payments over a fixed period or life) or annuity withdrawals of interest.
Fixed annuities are designed for long-term investors. Ordinary federal income taxes and a 10% tax penalty often apply to annuity withdrawals and surrenders taken prior to age 59½. However, you can consider “exchanging” your annuity to another company for an annuity that offers a better renewal rate history or more multi-year rate guarantee options. Assuming that all requirements of Internal Revenue Code §1035 are satisfied, you can exchange your old annuity and you will not owe any federal income taxes or penalties on the exchange. Surrender charges could still apply depending on your existing contract’s terms. Therefore, you would want to consider the comparative fees, surrender charges, and surrender schedules of the contracts prior to making an exchange for a higher annuity rate.
Before you make any changes, review your company’s annuity rate renewal history. This will show you the rate that the company paid past clients as their renewals came due. You need to ask for this. This could also indicate how well the company paid its existing annuity holders as compared to the annuity rate it paid to attract new investors.
If you are not clear on the renewal options you might have on your annuity, you can check Comparative Annuity Reports to see the annuity rates that various companies pay. You may also want to look at annuities that lock in the rates for the entire contract term. This way you will know where you’re going to be at the end of the fixed-rate guarantee period. (All annuity rates and guarantees are subject to the insurer’s claims-paying ability.)