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Understanding annuities

Key takeaways

  • Annuities can be both a boost to retirement savings and a dependable source of future income.
  • These investments can also help manage market volatility, the possibility you could outlive your savings, and the risk inflation will eat away at your savings in retirement.
  • They can help you grow retirement savings, even if you’ve maxed out contributions for the year to qualified plans such as 401(k)s and IRAs, and they aren’t subject to annual IRS contribution limits.
  • In retirement, annuities can offer pension-like cash flow, like a paycheck during working years.

Under ideal circumstances, no one would ever run out of money in retirement, and they’d have enough resources to meet all their essential expenses and more. But with stock market volatility, continuing inflation, and higher interest rates still in the picture, more people are searching for predictable income strategies to help meet their retirement needs.

Certain types of annuities can offer a boost to retirement savings, whereas others can offer a dependable income stream for people approaching or already in retirement. And like other types of fixed-rate products, such as bonds and certificates of deposit (CDs), higher interest rates mean you can get more income than you may have in the past.

In previous years people may have been more circumspect about investing in annuities, due in part to their reputation for complexity and high fees. Today, there’s a wide range of annuities, some of which are less complex and lower in fees and have a range of features that can help you achieve specific financial goals.

“Annuities can offer guarantees and security. Some annuities also offer flexibility around things like accessing principal or controlling the timing around taking distributions,” says Stefne Lynch, vice president of annuity product management and product engagement at Fidelity. “Annuity products have come a long way in recent years, enabling people to better match a specific annuity to their unique needs and preferences.”

To help simplify things, you can think of purchasing an annuity as existing on a life-stage continuum. When you’re saving for retirement, an annuity can offer market exposure, and growth potential that could complement other parts of your portfolio that are invested more conservatively, such as in CDs and bonds. They can also offer tax deferral as you build your nest egg.

As you begin to approach retirement, you may want some market exposure without taking on too much risk. There are annuities that can reduce market volatility risk, or you may even consider starting to purchase annuities that provide an income stream at a date you set in the future.

Lastly, when you retire, the need to cover your essential expenses can be critical. Annuities that provide regular payments can give you (and your spouse) guaranteed income either for life or a set period of time.

Ultimately, annuities can help manage 3 main retirement risks, namely, market volatility, the possibility you could outlive your savings, and the risk inflation will eat away at your savings.

Graphic showing 7 different types of annuities and product features such as tax-deferral, market participation, guaranteed rate of return, principal protection, access to assets, and guaranteed income.
Note the account value is not protected against losses that could be realized prior to the completion of the holding period.

What is an annuity?

At its most basic level, an annuity is a contract between you and an insurance company that shifts a portion of risk away from you and onto the company. There are 2 basic types of annuities:

Income annuities can offer a payout for life or a set period of time in return for a lump-sum investment. They can also be a boost to the conservative part of your portfolio by delivering contractually agreed upon payments in increments that can be monthly, quarterly, or even yearly. In all cases, since an income annuity's guarantees are subject to the claims-paying ability of the issuing insurance company, it is important to do your research and choose an annuity issued by a financially strong insurance company.

Tax-deferred annuities can allow you to accumulate tax-deferred savings while providing the option to create lifetime income in the future. Deferred annuities provide the opportunity to grow savings tax-deferred, which allows earnings to compound over time. Generally speaking, there are 2 ways to access your assets, each with its own tax implications. You can convert your savings into income and spread out the tax burden over the payments. You can also take withdrawals, which are taxed as gains first and then return of principal once gains are depleted.

Important to consider: Some deferred annuities impose surrender charges or other penalties for withdrawals within a certain period of time after purchase.

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How tax-deferred annuities can help savers

Deferred annuities can help you grow retirement savings, once you’ve maxed out contributions for the year to qualified plans such as 401(k)s and IRAs, and they aren’t subject to annual IRS contribution limits.1 Similar to retirement plans, any investment growth is tax-deferred and you won’t owe taxes on an annual basis. The best use of tax-deferred annuity assets is that they may be converted to an income annuity upon retirement, potentially resulting in lower taxes on the long-term gains.

You may also take withdrawals from your tax-deferred annuity without converting it to an income annuity, but your gains would be taxed at ordinary income tax rates.

Tax-deferred fixed annuities have a fixed rate of return that is guaranteed for a set period of time by the issuing insurance company. In contrast, with tax-deferred variable annuities, the rate of return—and therefore the value of your investment—will go up or down depending on the underlying stock, bond, and money market investment option(s) that you select, allowing you to benefit from any market growth.

Tax-deferred annuities can also help you use a strategy known as the anchor strategy. This strategy uses investments that offer a fixed return over a set period of time, such as CDs or tax-deferred fixed annuities, to protect a portion of your principal. Your remaining assets are then invested in growth-oriented securities such as stock mutual funds or exchange-traded funds (ETFs). The goal is to protect the principal of the conservative part of your portfolio while still retaining growth potential, which can help investors who are concerned about losing money during periods of market volatility.

Growing your savings prior to retirement

Among the annuities to consider if you are years away from retirement, a tax-deferred variable annuity2 can help you grow your savings on a tax-deferred basis by giving you market exposure. A tax-deferred variable annuity has underlying investment options, typically referred to as subaccounts, that are like mutual funds. There are no IRS annual limits to contributions and you choose how you’d like to allocate money among different investments to potentially benefit from market growth. And you can reallocate assets or trade among subaccounts within the annuity tax-free. Additionally, you don’t pay taxes until you receive an income payment or make a withdrawal, at which point earnings, as well as any pre-tax contributions, are taxed as ordinary income.

Tax-deferred variable annuities are typically invested with nonqualified money, or money that does not already have a special tax treatment such as 401(k) or IRA money. While you can benefit from a tax-deferred variable annuity’s market exposure, you’ll also pay fees for the annuity.

Good to know: For someone already in retirement, a tax-deferred variable annuity funded with after-tax (nonqualified) money can also serve as a wealth transfer device, as some insurance companies allow the tax savings to extend to a non-spousal beneficiary, who can then receive stretch payments over their lifetime.

Learn more about Fidelity Personal Retirement Annuity.

How annuities can help people nearing retirement

As you head into the 5- to 10-year homestretch before retirement, your financial plan will likely begin to change, especially as you consider shifting from saving to spending your nest egg. You may be looking for stable returns, or you may still be seeking growth potential from your savings.

While a tax-deferred fixed annuity (also known as a single premium deferred annuity, or SPDA) may be for someone living in retirement, if you’re looking for stable returns in the years prior to retirement, a tax-deferred fixed annuity can play a role in the conservative part of your portfolio by providing a fixed rate of return. Such an annuity guarantees a rate of return over a predetermined time, typically 3 to 10 years, similar to a bank CD which can also offer a fixed rate of return for a set period of time. And just like a CD, if you’re not ready to begin drawing income, you can roll those assets into a new contract with a new guaranteed rate of return. (An important difference is that many CDs are FDIC insured, whereas annuities are subject to the claims-paying ability of the issuing insurance company.) When interest rates increase, as they have over the past couple of years, it tends to drive up the rates offered by deferred fixed annuities and CDs.

It’s important to note that tax-deferred fixed annuities have surrender charges and aren’t intended for people who need access to their assets during the guarantee period. However, tax-deferred fixed annuities can offer some penalty-free liquidity, equivalent to 10% of the contract amount, for unexpected events or to satisfy required minimum distributions from retirement accounts. Taxes are owed on earnings when you start receiving payments.

Similarly, some annuities can guarantee return of your original investment at the end of a minimum holding period while also offering a degree of exposure to the markets. For example, a deferred variable annuity with a guaranteed minimum accumulation benefit (GMAB) can provide market exposure while guaranteeing the return of your initial investment at the end of a defined holding period, which is often 10 years. That’s regardless of market performance, and less the impact of any withdrawals or resetting of the benefit. When you purchase the contract, your principal is fully protected, and your underlying investment has the potential for long-term growth. A GMAB can let you benefit from market gains, but unlike stocks, if the market bottoms out, you get your original principal back in full.3

Keep in mind, however, that the benefit comes with a cost. Investors purchasing a GMAB should be comfortable paying a higher fee in return for the contract's protection.

For people who are just a few years from retirement, a deferred income annuity (DIA)4 can provide guaranteed income and a steady cash flow for life. DIAs should not be confused with a tax-deferred annuity, where taxes are deferred. Instead, DIAs provide a fixed payout—but, as their name implies, the payout is deferred until a predetermined date in the future that you select.

With a DIA, you may also take advantage of periodic investing to secure income payments in varying interest-rate environments. Each investment you make enables you to lock in income that is added to your final cash flow payment when you are ready to start. Similar to dollar-cost averaging, you may potentially benefit from a range of interest rates.

Annuities for people living in retirement

When you’ve reached retirement you may want the security of having a guaranteed source of income that can help cover your essential expenses, just as a paycheck did while you were working, and income annuities can offer a pension-like stream of income for life.5 Income annuities may even increase an investor's confidence to enjoy retirement more fully, because they offer dependable income that will last for a lifetime. Retirees will be more confident and comfortable spending money knowing they will always have dependable income in the future.

For example, an immediate fixed income annuity, also known as a single premium immediate annuity (SPIA), can provide immediate income in exchange for a lump-sum investment. It can offer a pension-like cash flow, and the guaranteed income isn’t subject to market volatility. Immediate fixed income annuities even have optional features and benefits such as a cost-of-living adjustment (COLA) to help keep pace with inflation and beneficiary protection such as a cash refund.

A cash refund guarantees upon the passing of the last surviving annuitant, the beneficiaries will be refunded any difference between your original principal and the payments received—eliminating the fear that the insurance companies will keep your money.

Immediate fixed income annuities may give investors the ability to share in the longevity benefits of the mortality pool. That means assets from other annuitants are pooled together by the insurance company, and those who live longer receive payments from those with shorter life spans. In other words, you won’t be in danger of running out of money. Instead, the longer you live, the more money you could receive.

Graphic showing hypothetical example of how an immediate fixed income annuity can offer a pension-like cash flow, and guaranteed income that isn’t subject to market volatility.
This hypothetical example assumes an investment by a 65-year-old male in a single-life immediate fixed income annuity with a 10-year guarantee period. Taxes are not reflected in this example. This hypothetical example is for illustrative purposes only. It is not intended to predict or project income payments. Your actual income payments may be higher or lower than those shown here.

And a joint and survivor immediate fixed income annuity may offer a simple, low-maintenance way to sustain a portion of retirement income for a surviving spouse or planning partner—which could be an important benefit in circumstances when the remaining spouse is not comfortable making investment decisions or doesn’t have the capacity to do so.

Good to know: If you purchase an immediate fixed income annuity, you may have limited or no access to the annuity principal.

Find out more about fixed income lifetime annuities in Viewpoints: Create income that can last a lifetime.

Finally, you can consider a guaranteed lifetime withdrawal benefit annuity (GLWB). This is an additional feature, called a rider, on either a tax-deferred fixed or variable annuity (based on the underlying investment within the annuity). An annuity with a GLWB provides guaranteed income for life even if the underlying investment account value (meaning the annuity’s) has been depleted.

The variable GLWB annuity allows you to remain invested in the market, but it guarantees income, and that income can increase based on markets, but it will not decrease.6 The longer you defer your income, the larger your payout could be. In addition, you have access to your account value should your circumstances change (surrender charges may apply and the guaranteed income amount will be reduced).

A GLWB annuity can give you more flexibility when you start taking income, including access to the account if your situation changes. That’s a bit different from a single premium income annuity, where you give up control of your money in exchange for a regular, steady lifetime payout.

Gaining peace of mind when retiring

Nobody knows how long they will live in retirement, so it’s critical to save for the time when you stop working, and to have guaranteed lifetime income to make sure your essential expenses are covered. Annuities can help you cover gaps, and they can play an important role as part of a broader retirement income plan to guarantee you’ll have income that you will never outlive. Make sure to consult with a financial advisor before purchasing an annuity, so they can help you understand the pros and cons of the various types of each annuity available to you. (You shouldn’t pay extra for riders or additional features that you simply don’t need.) And then select an annuity that meets a specific financial need as you plan your future.

Considering guaranteed income?

We make annuities available for a wide range of financial and life goals.

More to explore

Before investing, consider the investment objectives, risks, charges, and expenses of the annuity and its investment options. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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. They do not protect the value of the variable investment options, which are subject to market risk. The value of the variable investment options will fluctuate so that shares, when redeemed, may be worth more or less than the original cost.

Past performance is no guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss.

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate of your CD may be higher or lower than prevailing market rates. The initial rate on a step rate CD is not the yield to maturity. If your CD has a call provision, which many step rate CDs do, please be aware the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may be confronted with a less favorable interest rate at which to reinvest your funds. Fidelity makes no judgment as to the credit worthiness of the issuing institution.

For the purposes of FDIC insurance coverage limits, all depository assets of the account holder at the institution issuing the CD will generally be counted toward the aggregate limit (usually $250,000) for each applicable category of account. FDIC insurance does not cover market losses. All the new-issue brokered CDs Fidelity offers are FDIC insured. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value. This premium is ineligible for FDIC insurance. For details on FDIC insurance limits, visit

Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility, as well as to the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value in the case of exchange-traded notes). The degree of liquidity can vary significantly from one ETP to another and losses may be magnified if no liquid market exists for the ETP's shares when attempting to sell them. Each ETP has a unique risk profile, detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.

1. Issuing insurance company reserves the right to limit contributions. 2. Investing in a variable annuity involves risk of loss—investment returns and contract value are not guaranteed and will fluctuate. 3. The GMAB may not protect the account value from day-to-day market fluctuations or against losses that could be realized prior to the completion of the holding period. That means the GMAB will not provide a benefit if the policy is not held for the entire holding period after it is elected or reset. 4. Deferred Income Annuity contracts are irrevocable, have no cash surrender value and no withdrawals are permitted prior to the income start date. 5. Pension benefits are guaranteed by the plan sponsor unless the sponsor transfers the liability to a third-party insurance company. Unlike pensions, annuities must be purchased and have associated costs and expenses. 6. Assuming no withdrawals above your guaranteed amount are made.

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.

Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.

Fidelity insurance products are issued by Fidelity Investments Life Insurance Company (FILI), 900 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.

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