Fixed annuities – returns with minimised risk

During uncertain times, and as one gets closer to retirement, it is often prudent for investors to adopt a strategy to minimise investment risk.

However, most do not want to completely give up the ability for investment earnings and cannot afford to be invested in unreasonably low-yielding investment products. Most investors seek both safety and reasonable returns.

Given the ongoing uncertainty in the market, now may be a good time for clients and their advisors to re-evaluate portfolios to ensure that investment allocations meet a client’s current needs.

The following chart illustrates typical types of investments characterised by risk, as well as the possibility for gains and losses. See chart below.

Investors should select investment products that reflect their risk/reward appetite. Stocks may have the greatest possible gains, but also have the greatest risk of loss. Conversely, fixed annuities offer possible gain without any risk of loss.

Fixed and fixed index annuities: A zero-risk with upside philosophy

Many investors that were considering retirement in 2000 or 2008 were unable to do so because their wealth declined by 50% or more due to an over-allocation to stocks and other risky asset classes.

For investors that want a reasonable guaranteed interest rate for a set duration regardless of the broader market performance, a traditional fixed annuity may be a good option. Other investors that do not want to have risk but still want to participate in the gains of the stock market, may determine that a fixed index annuity is the ideal product.

How traditional fixed annuities work

A fixed annuity is a simple investment product that guarantees a set investment return over the life of the product. Typically, a multi-year guaranteed fixed annuity can be purchased for three, five, seven or 10 years in duration. Prior to purchasing the product, the client is quoted a guaranteed rate of return – the longer the client is willing to invest, typically the higher the quoted rate.

Guaranteed interest and other features

For example, if a client purchases a five-year fixed annuity, they might earn 2.5% every year for five years, irrespective of the market performance. For an investment of $100,000, where the interest compounds annually, the client would have $113,141 at the end of the five years – a nice guaranteed return of over $13,000 with absolutely no investment risk.

Traditional fixed annuities typically have liquidity features where the client can withdraw 10% of the initial premium per year. However, if there are withdrawals above the “free” amount, there are withdrawal charges. Most withdrawal charges are calculated as a percentage of the amount withdrawn over the free amount and decline the longer the policy is in existence.

At the end of the initial term, the client can withdraw their money without charges, reinvest at the same or a different duration, or annuitise their money. Annuitisation simply means that the insurance company will guarantee the client a monthly payment for a set duration of 10 or 20 years or for their life. By converting the lump sum value of the policy to a guaranteed income stream, a client has peace of mind and certainty. If a life annuitisation is selected, they have a guaranteed monthly payment that they cannot outlive.

Estate planning benefits

Since an annuity is an insurance product, the client has the ability to name one or more beneficiaries. If the client dies while the policy is in existence, the proceeds of the policy are paid directly to the beneficiary without any charges. The payment may also avoid probate proceedings, where heirs or other interested parties have the opportunity to object or contest the client’s last will and testament.

No fees

One of the other great things about a fixed annuity is that there are no fees. Mutual funds, variable annuities and similar products can have administration, fund and expense charges. According to, the average variable annuity expense is 2.30% and can be more than 3%. That means a client will lose money until the product generates returns that exceed the total expenses. This is obviously a large drag on returns that simply does not exist with fixed annuities.

Given the economic climate and high investor fear, now may be an ideal time to ensure a portfolio’s allocation meets the client’s current needs and desires. Most agree that some portion of the average investor’s assets should be in a fixed return product.

This allocation should typically become a larger percent of the overall portfolio as the person gets older. It is more important than ever to make sure you have the right financial plan in place to secure your future. A safe and simple product like a fixed annuity from a well-rated and dependable insurer offers certainty and peace of mind.

– Knighthead Annuity & Life Assurance Company

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