Fixed annuities: What they are & how they work

Fixed annuities provide a guaranteed income stream over a specific time period, with a predetermined rate of return. They offer a low-risk, tax-deferred way to supplement your retirement plans.

Headshot of Katherine Murbach


Katherine MurbachEditor & Licensed Life Insurance AgentKatherine Murbach is a life insurance and annuities editor, licensed life insurance agent, and former sales associate at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.

Edited by

Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and, as well as a principal writer covering personal finance at CNET.

Reviewed by

Ian Bloom, CFP®, RLP®Ian Bloom, CFP®, RLP®Certified Financial PlannerIan Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.

Updated|8 min read

Expert reviewedExpert reviewedThis article has been reviewed by a member of ourFinancial Review Council to ensure all sources, statistics, and claims meet the highest standard for accurate and unbiased advice.Learn more about oureditorial review process.

Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

Fixed annuities are insurance contracts that guarantee a steady source of future income. The distinguishing feature of a fixed annuity is a fixed rate of return set by the insurer. This predetermined interest rate makes fixed annuities the most straightforward and risk-averse type of annuity, since you know exactly how much your money will grow before you even sign the contract.

Key takeaways

  • Fixed annuities are a type of insurance contract that offers you guaranteed income over a specified period of time. 

  • They provide reliable, tax-deferred growth at a fixed interest rate, but you’ll have to pay penalty fees for early withdrawals, and your payouts may lose purchasing power due to inflation.

  • If you’re looking for a low-risk way to add to your retirement income, a fixed annuity may be a good fit for you.

What is a fixed annuity?

A fixed annuity is a basic type of annuity that provides a guaranteed stream of income over a period of time — either a predetermined number of years, or for the rest of your life, depending on your contract. The terms and parameters of your contract will depend on the insurer and the type of fixed annuity you choose.

What are the different types of fixed annuities?

Fixed annuities can be immediate or deferred — in other words, they can begin providing income immediately (or no more than one year after the annuity is purchased), or they can be delayed for several years, usually between three and 10. [1] The best time to begin receiving annuity payments depends on your personal financial situation and when you need income.

  • “Immediate fixed annuities are ideal for people who need guaranteed income quickly,” says Shawn Dye, senior manager of product marketing at Zinnia. With an immediate fixed annuity, you immediately pay a lump sum of money to an insurer, then receive regular income payments within a year. The amount of your income payments is fixed, and based on factors like your age, the lump sum amount you paid, and current interest rates.

  • By contrast, “deferred fixed annuities are ideal for people saving for future income who want their investment to grow over time,” says Dye. With a deferred fixed annuity, you can either make a lump-sum payment or a series of payments over time to the insurance company. In return, your money grows tax-deferred at a fixed interest rate during the so-called “accumulation period” — usually somewhere between three and 10 years — after which you’ll start receiving regular income payments.

Learn more about other types of annuities

How do fixed annuities work?

The money you contribute to a fixed annuity grows at a fixed interest rate set by your insurer. The rate is fixed for a set period — often a year — and then your insurer will set a new rate for the next period. You’ll also have a guaranteed minimum rate of return. [2]

Your income payments are guaranteed to remain the same. You’ll choose how much money you want to contribute to the annuity and when you want to start receiving payments.

“In many ways, a fixed annuity is much like a longer-term CD,” or certificate of deposit, says Jake Herskovits, carrier relationships manager at Policygenius. Fixed annuities are similar to CDs because you’re locking in an interest rate for a predetermined amount of time. But unlike CDs, you won’t have to pax taxes on the interest your annuity accrues each year (you’ll only pay taxes on the income payments you receive).


The premiums are the payments you make to fund your annuity. You can make a single payment in a lump sum (as in the case of immediate annuities) or you can make multiple payments. If you opt to make multiple payments, your premiums will be invested over a set period of time, during the so-called accumulation period, which we’ll discuss next.

Accumulation period

The accumulation period is the time during which you fund your annuity with the goal of increasing its value. During this time, you make regular premium payments and your funds gain interest. You won’t receive any payments from your annuity during this time — and you typically won’t be able to make withdrawals without incurring penalty fees, either.

Fixed deferred annuities can have different lengths of accumulation periods depending on the terms of your contract — and fixed immediate annuities don’t have an accumulation period at all, because payments may begin right away.

Annuitization or payout phase

Once the accumulation period ends, you have the option of converting the accumulated value in your annuity into income payments you'll receive from the insurer. This process is called annuitization.

During the annuitization phase, you’ll receive the guaranteed minimum payouts offered by your insurer as stated in your contract. Most often, you’ll receive income payments on an annual or monthly basis, depending on the schedule you chose when you bought your annuity.

The payout period can last for a certain number of years — for example, 10 or 20 years — or for the rest of your life, depending on the terms you choose when you purchase your contract.

Surrender period

If you buy a deferred annuity, you’ll have a set surrender period — a time frame during which you can’t withdraw funds from the accumulated value in your contract without paying extra fees. Your surrender period will depend on the specific type of annuity you purchase and the terms of your contract — it could last for five to 10 years, or sometimes longer.

Fees & penalties

In general, fixed annuities charge fewer management fees than other types of annuities.

If you withdraw money from a deferred fixed annuity early (i.e., before the surrender period is over) you’ll have to pay a surrender fee. Some surrender fees decrease gradually over time, meaning the earlier you make a withdrawal, the steeper the surrender fee will be. For instance, you might pay a 7% surrender fee in year one, a 6% surrender fee in year two, and so on. [3]

Most annuities have some type of surrender fee, but not all do. Fees can vary between different types of annuities and different insurers, so it’s important to be familiar with the terms of your specific contract.

Guarantees & riders

Fixed annuities guarantee a specific income payment amount and a fixed interest rate for a specific period of time. However, you can also customize your annuity with riders, which are additional features you can add to your contract at the time of purchase.

Riders generally fall into two categories: living benefits and death benefits.

  • Living benefits add value to your annuity or impact your income stream while you’re still alive. For example, your annuity might have a guaranteed minimum accumulation value (GMAB) or a cost of living adjustment rider (COLA) so your payments can keep up with inflation.

  • Death benefits guarantee a certain payout amount to your beneficiaries if and when you — the annuitant — die. Death benefits can be guaranteed if you die within a certain number of years after buying your contract, or they can be guaranteed for life.

While these riders can help you maintain your purchasing power over time, riders will also reduce the amount of your annuity income payments since the insurance company will usually charge a fee for them. Make sure to weigh the pros and cons of adding a rider to your annuity with help from an advisor.

Tax implications

Annuities offer tax control — meaning you know exactly when you’re going to get taxed and can plan accordingly. You’ll only have to pay taxes on your earnings when you take withdrawals. 

If you fund your fixed annuity with post-tax dollars (also called non-qualified funds), you’ll only pay taxes on the interest earned, rather than taxes on both the principal and the interest. 

Learn more about non-qualified annuities

By contrast, if you fund your annuity with pre-tax dollars (also called qualified funds) — for example, with money from a 401(k) or an IRA — you’ll pay taxes on the principal and the interest when you take a withdrawal. [4]

Learn more about qualified annuities

Other types of fixed annuities

Fixed annuities can come in many forms and variations, depending on the insurance company you’re shopping with. Here are some of the most common types of fixed annuities on the market.

What is a fixed indexed annuity (FIA)?

Fixed indexed annuities (FIAs) provide growth rates based on the performance of a market index, such as the S&P 500. Fixed indexed annuities also come with caps and floors to protect you and the insurer from bigger market fluctuations, therefore guaranteeing a minimum growth level along with a maximum growth limit for the money you contribute to the annuity.

Most FIAs are a type of deferred annuity, which means you don’t start receiving payments immediately, but instead allow your money more time to grow.

What is a multi-year guaranteed annuity (MYGA)?

A multi-year guaranteed annuity (MYGA) is a type of fixed annuity that guarantees a fixed interest rate for a predetermined number of years, usually between three and 10. This differs from other kinds of fixed annuities, in which the insurer may set a slightly different interest rate on an annual basis. However, all fixed annuities come with a guaranteed minimum interest rate.

What is a single-premium immediate annuity (SPIA)?

A single-premium immediate annuity (SPIA) begins providing income payments immediately, or at least no more than a year after you purchase it. Most SPIAs are fixed annuities: in return for making a single lump-sum premium payment to fund the annuity, your annuity income payments are guaranteed to pay out at a specified value every month or year, depending on the terms of your contract.

What are the pros & cons of fixed annuities?

“Fixed annuities get the upside market potential with no downside risk,” says Amy Shirk, sales associate at Policygenius. In other words, fixed annuities can provide the peace of mind of a guaranteed interest rate, since you know you won’t suffer a loss. However, they usually offer lower returns than other types of annuities.

Here are a few more benefits and drawbacks of fixed annuities to consider.


  • Guaranteed income. Fixed annuities provide a predictable income over the timeline specified in your annuity contract. This guaranteed minimum interest rate can help you plan to cover certain expenses in retirement.

  • Risk-free value growth. Fixed annuities can help you increase the value of your retirement savings while avoiding market risks.

  • Tax-deferral. You won’t pay taxes on interest growth until you withdraw money from your annuity. You can plan exactly when and how your earnings will be taxed.

  • Flexible contributions. While other tax-advantaged accounts like 401(k)s and Roth IRAs have contribution limits, fixed annuities don’t have limits for contributions, as long as you contribute with after-tax dollars, which can be especially helpful for high-net-worth individuals.

  • Customizable. Fixed annuities can be personalized based on your needs with a variety of add-ons that can guarantee a minimum payout, additional living benefits, death benefits, and more.


  • Fixed annuities aren’t liquid. Once your contract is active, you can’t access your money until a specified amount of time has gone by (also known as the surrender period).

  • Fees for early withdrawal. If you withdraw money from your annuity before you reach age 59 ½, you could face early withdrawal penalties or need to pay additional taxes.

  • Low growth potential. Fixed annuities usually have lower returns compared to other more-aggressive investment products, like index funds or even variable annuities.

  • Inflation risk. Since fixed annuities guarantee a certain amount of income, your money can lose buying power over the years due to inflation.

What should you consider before buying a fixed annuity?

Fixed annuities are relatively straightforward when compared to other types of annuity contracts, but they aren’t the best fit for everyone. Here are a few key details to consider before buying.

Your age

Many people use fixed annuities to supplement retirement income — and your age usually factors in to when you expect to retire. If you’re approaching retirement and you don’t have a pension or some other form of guaranteed income, you may consider using a fixed annuity.

On the other hand, if you’re young and you have many years of your career ahead of you, you may be looking for higher returns on your investment over time, making other types of annuities more attractive.

Your investment goals

Generally speaking, fixed annuities are best used to supplement retirement income due to their guaranteed payment size and schedule — but their returns are modest compared to the potential returns from other types of annuities. If securing a predictable income for life is your primary financial concern, you’ll likely want to consider a fixed annuity, but if your risk tolerance is higher and you'd like to maximize your potential returns, other types of annuities may be a better choice.

Your risk tolerance

If you have a relatively low risk tolerance, fixed annuities may be a good fit for you since they offer a guaranteed rate of return. Other contracts — like variable annuities — can have fluctuating interest rates based on their corresponding investments, non-guaranteed returns, and therefore a higher investment risk overall.

Who should consider a fixed annuity?

Fixed annuities offer a high degree of security and predictability in exchange for relatively modest returns. This type of financial product works for “someone looking to have a portion of their portfolio in a guaranteed bucket of money,” says Tony Boyden, learning and development partner at Zinnia.

Ultimately, the type of annuity that’s right for you depends on your personal financial situation, as well as the factors listed above, so speaking with a financial advisor can help you make a choice that best fits into your overall financial plan.

Explore other annuity options


dropdown arrow

Policygenius uses external sources, including government data, industry studies, and reputable news organizations to supplement proprietary marketplace data and internal expertise. Learn more about how we use and vet external sources as part of oureditorial standards.

  1. FINRA

    . "


    ." Accessed April 25, 2024.

  2. NAIC

    . "

    Buyers Guide to Fixed Deferred Annuities: Fixed Annuities

    ." Accessed April 26, 2024.

  3. Insurance Information Institute

    . "

    What are surrender fees?

    ." Accessed April 25, 2024.

  4. IRS

    . "

    Publication 575 (2023), Pension and Annuity Income

    ." Accessed April 25, 2024.


Katherine Murbach is a life insurance and annuities editor, licensed life insurance agent, and former sales associate at Policygenius. Previously, she wrote about life and disability insurance for 1752 Financial, and advised over 1,500 clients on their life insurance policies as a sales associate.


Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and, as well as a principal writer covering personal finance at CNET.

Expert reviewer

Ian Bloom, CFP®, RLP®, is a certified financial planner and a member of the Financial Review Council at Policygenius. Previously, he was a financial advisor at MetLife and MassMutual.

Questions about this page? Email us at .