What is a guaranteed annuity contract?
Guaranteed annuity contract covers multiple annuitants
A guaranteed annuity contract (often called a group annuity contract) is a type of annuity that covers a group of annuitants who are usually linked through work or membership in a group or organization. Because multiple annuitants can be covered under one contract, the expenses (per annuitant) for the annuity tend to be lower than if separate annuities were purchased for each person.
Usually has a fixed rate of interest
A guaranteed annuity contract is similar in some respects to a fixed annuity. The issuer of the guaranteed annuity contract will usually guarantee that the annuity will be credited with a fixed rate of interest for a certain period of time. For example, the issuer may guarantee that it will pay 6 percent on the annuity for the first five years of the contract and then pay a minimum of 4 percent for the remainder of the contract. Typically, the annuity issuer will also agree to renew the annuity after the initial period and pay the higher rate of interest for another term, depending on the level of interest rates at the time.
Used frequently by companies to fund pension plans
Guaranteed annuity contracts were developed in the 1920s and used frequently by large corporations to fund their defined benefit pension plans. The insurance industry developed many specialized types of guaranteed annuity contracts to meet the specific needs of many corporate customers. As the number of defined benefit pension plans declined over the years and as defined contribution plans increased in popularity, many companies used guaranteed annuity contracts in the 1970s to fund their defined contribution retirement plans.
Not frequently used in recent years
The use of guaranteed annuity contracts has declined in popularity in recent years, partly because of the rapid changes in interest rates. Although there are still some guaranteed annuity contracts in existence, very few companies or groups offer this type of annuity to their employees or to their members.
Similar to fixed annuities
In many respects, guaranteed annuity contracts are similar to fixed annuities (except that guaranteed annuity contracts are used to cover a group of individuals). Many of the strengths and tradeoffs to guaranteed annuity contracts and many of the tax implications are similar to fixed annuities.
For personalized assistance with understanding guaranteed annuity contracts or exploring your financial options, contact Scarlet Oak Financial Services today. Let us help you navigate the world of annuities and make informed decisions about your financial future. Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
