Pros and Cons Of The Fixed Rate Annuity
Even though the fixed rate annuity product is something that can be quite controversial, there are as many arguments for them as there are against them. The arguments against immediate annuities are often taken out of context and given disproportionate attention. These types of arguments are very confusing for prospective investors and create more questions than they answer. However, when a fixed rate annuity contract is understood, researched and properly implemented it can be a beneficial contribution to a properly balanced investment portfolio and used as a planning tool.
Though many financial advisors focus on some of the disadvantages of these products, there are also many advisors who tend to focus on the positive aspects. These two groups are divided mainly because of what they have determined to be the most important feature of the fixed annuities. It can probably be said that both sides are overacting and should more objectively review these products.
Any investment product with a fixed interest rate can be very susceptible to inflation. This is because the rate of return will not be adjusted when inflation rises. For a short-term investment, usually less than five years, inflation will not have a major negative impact. However, for any investment greater than five to ten years, inflation should be thoroughly considered prior to entering any contract with a fixed rate. The increase in inflation can certainly reduce the real income received from a fixed product over a long period of time and the investor may eventually be unable to meet fixed obligations. It is important to remember that fixed rate products also have other advantages including the fact that the return is guaranteed and will not fluctuate when the market drops.
A final, major disadvantage of any annuity contract is the general inability to pull funds out of the investment if you need to access your principle. These funds often charge significant fees and penalties to remove money prior to the contracted termination date.
Remember that no financial product is going to be perfect or have all the features that the investor desires. For example, if the contract lacks inflation protection, it may be considerably less safe compared to other products in high-inflation environments. The key when choosing a product is determine the features that you require and ensure that the advantages outweigh the disadvantages in products you are considering.
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