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Know the Difference: Fixed and Variable Annuities

By Compuquotes Team on March 27th, 2008

Annuity

You are now contemplating at what type of retirement plan you would embark into. And you have set your eyes on annuities because of the many good things you have heard about this investment plan, that this is one of the best choices for a retirement plan. Now that you have known the basics of annuities, the question now is, "Which type of annuity would you choose: a fixed or variable annuity?"

For an investor like you, knowing the difference between fixed annuity and variable annuity will save you a lot of trouble in the long run.

Difference lies in the interest rate

An annuity is an investment plan that amount of the investment grows from a period time and the payout may be made monthly, quarterly or lumpsum.

How to invest your money in annuity depends largely on your choice. You may either choose for a fixed or variable annuity.

A fixed annuity, as its name implies has a fixed interest rate. Changes in currency or stock market will not affect the monthly interest rate. Your interest rate is consistent up to such time that your annuity has matured.

Variable annuity, on the other hand, has a variable interest rate. Changes in the stock market affect the amount of interest that you have to pay. If the stock market is good and the currency in which your annuity is based, your interest will be lesser than usual. The downside with this is if the stock market has a downgrading trend, your interest rate will increase, too.

Taxes on variable annuities

The difference does not end with interest rates. Taxes come into play also.

Variable annuity as opposed to fixed annuity has a tax-deferred saving feature. This means that if you enroll for a variable annuity, you don't have to pay for any taxes on your earnings. You have to pay for taxes only after you have withdrawn your money.

Payout difference

Of course, there is also a difference in the payout amount. With fixed annuity, you have a fixed amount for payout. Even if the market has performed well, you won't benefit much from it. With variable annuity, on the other hand, you can have a chance to receive a higher payout. If your broker knows how to play your money, you can earn a handsome amount when you reach retirement.

Which of the two

Knowing now the difference between fixed and variable annuity, which of the two is for you?

The answer here will depend largely on your personality.

If you were the type of person who hates fluctuations in earnings or is afraid to lose much (but is okay with the fact that he can only earn decently, so long as he can earn), then fixed annuity is for you. In short, fixed annuity is for people who are afraid to take risk.

However, if you were a risk taker and loves adventure and loves to gamble, then variable annuity plan is for you. With variable annuity, if you play your cards well, you can earn handsomely, more than you could ever imagine.

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