Disadvantages of a Deferred Fixed Annuity

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Disadvantages of a Deferred Fixed Annuity

  1. Low Growth Potential: Deferred fixed annuities often have lower growth potential compared to other investment options due to their conservative nature.
    • Advantage in Fixed Indexed Annuity: Offers potentially higher returns linked to a stock market index, allowing for potentially higher growth while still providing protection against market downturns.
  2. Inflation Risk: The fixed interest rate might not keep up with inflation, leading to a decrease in purchasing power over time.
    • Advantage in Fixed Indexed Annuity: Some indexed annuities offer inflation protection features or annual increases in benefits to mitigate inflation risk.
  3. Liquidity Issues: Early withdrawal from a deferred fixed annuity often incurs substantial penalties and fees.
  4. Limited Flexibility: Once you commit to a deferred fixed annuity, changing the terms or switching investment options can be difficult.
    • Advantage in Fixed Indexed Annuity: Offers more options for reallocating investments among different indexes or changing the level of participation in the index.
  5. Complexity and Fees: Deferred fixed annuities can be complex financial instruments with various fees and charges.
    • Advantage in Fixed Indexed Annuity: While also complex, some offer clearer fee structures and potentially lower costs depending on the contract.
  6. Interest Rate Sensitivity: When interest rates rise, the value of the fixed annuity can decline.
    • Advantage in Fixed Indexed Annuity: Less sensitivity to interest rate changes due to the linkage to market indexes.
  7. Taxation on Earnings: Earnings are taxed as ordinary income upon withdrawal, which might be higher than capital gains tax rates.
    • Advantage in Fixed Indexed Annuity: The tax treatment is similar, but the potential for higher earnings can provide more after-tax income.
  8. Beneficiary Limitations: Options for beneficiaries might be limited or come with additional costs.

Comparing Deferred Fixed and Fixed Indexed Annuities

FeatureDeferred Fixed AnnuityFixed Indexed Annuity
Growth PotentialLow, fixed interestPotentially higher, linked to index
Inflation RiskHigherMitigated with features
LiquidityLimited, high penaltiesMore flexible options
FlexibilityLimitedHigher, with various investment choices
Complexity & FeesComplex, various feesCan have clearer fee structure
Interest Rate SensitivityHigherLess sensitive
TaxationTaxed as ordinary incomeSimilar, but potentially more after-tax income
Beneficiary OptionsLimited or costlyMore flexible and beneficial

Conclusion

Deferred fixed annuities offer security and guaranteed income but come with limitations such as low growth potential and liquidity issues. Fixed indexed annuities, in contrast, provide a balance between security and growth, offering higher potential returns and more flexibility. They are a viable option for those seeking a mix of security and growth in their retirement planning.

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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