1. Is your fixed annuity interest rate really fixed, or can it decrease over time?

Typically, an annuity company will give you a particular rate up front on a fixed annuity, and then decrease that rate over time (typically after one year). This is what is commonly referred to as a banded rate annuity. The issuer gives you a one-year guarantee of a rate that looks great, and the duration of your surrender period (typically seven years) and the renewal rate is at the company’s discretion. We refer to this as the “trust me” factor. The company has no written obligation to renew your rate above their two or three percent minimum guaranteed interest rate, and they have you locked in for the next seven years, on average, with penalties if you leave. If you are considering one of these “banded” type annuities be certain to request a renewal rate history. This will show you how other investors were renewed in their subsequent years.

At Annuity FYI we generally prefer what we call a “no-surprise” approach to annuities, versus a one-year guarantee and six years of “trust me, we’ll take care of you.” We like companies that will guarantee your rate for three to ten years at the same rate at which you purchase the annuity. Make sure that your surrender period is the same as your guarantee period — e.g. for a five-year surrender a five-year guarantee.

Take for example, an investment of $10,000 in a banded rate annuity with a 7.9% rate for the first year in a seven-year contract with no guarantee of a renewal rate above the company’s 2% to 3% minimum guaranteed interest rate. After seven years, this annuity could be worth as little as $12,883. Then take, on the other hand, a fixed annuity guaranteed at 7% for seven years. At the end of the term, this annuity would be guaranteed to be worth $16,057.

What if you’re already in a banded rate annuity? You have two choices: suck it up for the remainder of the term, or upgrade your annuity when the rate falls by executing a 1035 Exchange or qualified transfer. There are two important considerations when deciding whether or not to upgrade your annuity: the surrender charge for leaving your existing annuity, and the length of time it will take to make up the surrender charges paid with the presumably higher rate of the new annuity. In a lower interest rate environment it is advisable to wait until rates rise to historically higher levels, since when you switch you’ll probably be going back into a new penalty period and you want to make your move count.

Upgrading from your existing annuity to a new annuity requires careful consideration. Financial analysis is necessary to determine how you can get the best return on your money. Our Annuity FYI Annuity Qualifier and our Annuity FYI Experts can help you determine if you can get a better overall return on a new annuity than the one you’re in now.

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