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What Are Annuities?

Annuities can be used to help you increase your savings, protect what you've saved, or generate a stream of income.

Annuities generally fall into two categories: deferred and income. Each works differently and offers unique advantages.

Tax-deferred annuities: for retirement savings

Deferred annuities can be a good way to boost your retirement savings once you've made the maximum allowable contributions to your 401(k) or IRA.1 Like any tax-deferred investment, earnings compound over time, providing growth opportunities that taxable accounts lack.

Deferred annuities have no IRS contribution limits,2 so you can invest as much as you want for retirement. You can also use your savings to create a guaranteed3 stream of income for retirement. Depending on how annuities are funded, they may not have minimum required distributions (MRDs).

Bear in mind that withdrawals of taxable amounts from an annuity are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty. Annuities also come with annual charges not found in mutual funds, which will affect your returns.

Deferred variable annuities have funds that may have the potential for investment growth. However, this involves some market risk and could result in losses if the value of the underlying investments falls. Variable annuities are usually appropriate for those with longer time horizons or those who are better able to handle market fluctuations.

Deferred fixed annuities offer a guaranteed3 rate of return for a number of years. Fixed deferred annuities may be more suitable for conservative investors or for those interested in protecting assets from market volatility. In this way, they’re similar to certificates of deposit (CDs).

However, deferred fixed annuities differ from CDs in that:

  • Annuities are not FDIC-insured.
  • Withdrawals from annuities prior to age 59½ may be subject to a 10% IRS penalty.
  • Deferred fixed annuities may offer more access to assets than a CD.
  • Annuity earnings compound on a tax-deferred basis.

Income annuities: for income in retirement

Income annuities may be appropriate for investors in or near retirement because they offer guaranteed3 income for life or a set period of time. They may allow you to be more aggressive with other investments in your portfolio, since they provide a lifetime income stream.

Keep in mind that you may have limited or no access to the assets used to purchase income annuities.

Immediate variable income annuities offer an immediate income stream with growth potential, which may help keep pace with inflation. This income is guaranteed3 for life, but the amount of each income payment is not guaranteed—the payment amount will vary based on the performance of the annuity's underlying investments.

Immediate fixed income annuities offer a guaranteed,3 predictable payment for life, or for a certain period of time. Your guaranteed income payment cannot be affected by market volatility, helping shield your retirement income from market risk.

A cost-of-living increase is available at an additional cost to help your buying power keep pace with inflation.

Deferred income annuities4 are fixed income annuities that have a deferral period before income payments start. Because of the deferral period, you may get a higher income payment amount than you would from a comparable immediate fixed income annuity with the same initial investment. The cost-of-living increase is also available at an additional cost for deferred income annuities.

Living benefit annuities: for income generation and growth potential

Many people nearing or in retirement are looking to establish an income stream for the long term but still want to participate in the market. Deferred variable annuities with guaranteed3 living benefits provide both guaranteed lifetime income and growth potential, and may offer access to assets5 as well.

These "hybrid" annuities can provide a lifetime guaranteed income stream for you (or you and your spouse). The income payments will not be reduced by poor market performance, even if the contract value declines as a result.

In fact, if the account's investments perform well, the income payments may increase.6 Those increases are also protected from any later market declines.5

1. Each individual's situation is unique and therefore seeking additional guidance from a tax advisor is suggested. Although variable annuities offer tax-deferral, if you are considering one to fund a qualified retirement plan or IRA, you should do so for the variable annuity's features and benefits other than tax deferral. In such cases, tax deferral is not an additional benefit of the variable annuity. References throughout this material to tax advantages, such as tax deferral and tax-free transfers, are subject to this consideration.
2. Insurance companies reserve the right to limit contributions.
3. Guarantees apply to certain insurance and annuity products and are subject to product terms, exclusions and limitations and the insurer's claims-paying ability and financial strength.
4. Deferred Income Annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted prior to the income start date.
5. Excess withdrawals may significantly reduce the guaranteed withdrawal benefit amount. Surrender charges may apply. Withdrawals of taxable amounts are subject to ordinary income tax, and if made before age 59½ may be subject to a 10% IRS penalty.
6. When the contract value exceeds the benefit base, which in certain contracts is also called the guaranteed withdrawal benefit value, the benefit base may increase. Age restrictions may apply. Withdrawals will reduce the contract value and death benefit, if applicable, and may impact whether your income payments will increase even if your contract value is increasing.
Investing in a variable annuity involves risk of loss—investment returns, contract value, and, for variable income annuities, payment amount are not guaranteed and will fluctuate.
Fidelity insurance products are issued by Fidelity Investments Life Insurance Company (FILI), 100 Salem Street, Smithfield, RI 02917, and in New York, by Empire Fidelity Investments Life Insurance Company,® New York, N.Y. FILI is licensed in all states except New York. Other insurance products available at Fidelity are issued by third party insurance companies, which are not affiliated with any Fidelity Investments company. A contract's financial guarantees are subject to the claims-paying ability of the issuing insurance company.
Before investing, consider the investment objectives, risks, charges and expenses of the annuity and its investment options. Call or write to Fidelity or visit Fidelity.com for a free prospectus and, if available, summary prospectus containing this information. Please read the prospectus and consider this information carefully before investing. Product availability and features may vary by state. Please refer to the contract prospectus for more complete details regarding the living and death benefits.
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