What’s the “Real” Fixed Annuity Rate?

Annuity rates can often change in tandem with the rates paid on other fixed interest investments. However, whenever rates drop, the real return on annuities could potentially be higher than other interest-paying assets. First of all, fixed deferred annuities typically promise a minimum rate of return for the term of the contract. For example, if you select a fixed annuitythat locks in current rates for five years, you will earn a competitive rate for the first five contract years.  After that, you will receive no less than the minimum rate, regardless of how low market rates might possibly go.  Such an annuity is called a multi-year guarantee annuity. Second, annuities are tax-deferred investments. That means the earnings on your annuity’s principal will compound without you owing current taxes. Other fixed income investments, such as CDs, are taxed as interest is credited (of course, CDs are FDIC insured for up to $250,000 per account per beneficiary through 12/31/09). Even if you reinvest the interest, you have to pay income tax. This reduces the effective rate of return on your taxable fixed interest investments. Please note, however, that annuities are designed for long-term investing and ordinary federal income taxes and a 10% tax [...]

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