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Fixed Tax Deferred Annuities

Fixed tax deferred annuities are invested primarily in government securities and high-grade corporate bonds. They offer a guaranteed rate, typically over a period of one to ten years, and have an average surrender charge that decreases over 7 years, i.e. 7,6,5,4,3,2,1,0%. They give the investor payments starting at some later date, usually at retirement. You can invest either a lump sum, or make periodic payments. Those funds grow tax-deferred until you’re ready to begin receiving payments.

There are two basic types of fixed tax deferred annuities: Guaranteed Return Annuities (GRA) and Market Value Adjustment annuities (MVA). The GRA offers a guarantee that you can never receive less than 100% of your investment — no penalties or fluctuations in the interest rate market can impact your principal should you surrender. Although this sounds like an important feature, only in very rare cases would it actually be meaningful. One example is if rates rose rapidly over a very short period following the purchase of a GRA. In that event you could surrender the contract, thus losing your interest for the period invested, but leaving your principal intact. At this time, your money could be reinvested into the now higher current rates (probably with another carrier). A GRA will sometimes offer a one-year interest rate guarantee with a five-year to seven-year surrender charge (penalty for early withdrawal).

The other type of fixed tax deferred annuity is the Market Value Adjustment annuity (MVA). This annuity works much like the GRA, but there is no guarantee of your principal if rates rise and you surrender your contract. MVAs work like a bond and often pay more than a GRA due to the increased short-term risk of rising rates. The interest rate guarantee tends to match the surrender charge — for example, a seven-year guarantee with a seven-year surrender charge. Annuity FYI generally recommends the MVA over the GRA if a preferential rate is available.

In almost every case Fixed Annuity Guarantees are subject to the claims paying ability of the issuing life insurance company. Therefore it is very important that you check the latest financial strength ratings of the insurance company before investing any money. As a rule of thumb, look for an A rating or better with A.M. Best, AA or better with Standard and Poors, AA or better with Fitch, and Aa3 or better with Moody’s. Annuity FYI can furnish you with the latest safety ratings upon request.

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