An annuity is a contract with an insurance company that consists of two parts: the accumulation period and the payout period.

In the accumulation period, the annuity owner (annuity holder) pays premiums to the company. Traditionally, the premium was paid as one lump sum, although more flexible premium arrangements are available today. The premiums go into a general account, which is invested primarily in high-grade, fixed-income securities, such as bonds and mortgages.

In the payout period, you annuitize the account; i.e., you surrender the value of the annuity in exchange for guaranteed monthly payments of benefits. The sizes of the benefits are fixed upon annuitization. The person who receives the benefit payments is called the annuitant; commonly, the annuity owner and the annuitant are the same person. The benefit payments are based on the age and sex of the annuitant, and the payout option selected.

A fixed annuity is fixed in two ways. While your premiums are accumulating, your principal is guaranteed and your account is guaranteed to grow at a fixed income rate. Your interest income grows tax-deferred. During the payout period, your monthly income is fixed at a guaranteed amount, calculated according to your age, sex, and the payout option you select.

In this way, a fixed annuity is distinguished from a variable annuity. With a variable annuity, your premiums are invested in your choice of available investment options. The return on your investment cannot be fixed and your principal is not guaranteed; instead, returns and account values will vary with market conditions.

Fixed annuities are a time-honored investment designed to provide a guaranteed income for retirement.

Fixed annuities are long-term investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims-paying ability of the issuing company. Withdrawals made prior to age 59½ are subject to a 10% IRS penalty tax, and surrender charges may apply.