With bank savings accounts earning pennies in interest, and even long-term certificate of deposit rates low, it can cause a squeeze in the household finances. One result is some people go on yield safaris, looking for bigger interest game. While there is nothing wrong with trying for higher returns, the concern is that the potential for loss is sometimes overlooked.
 
If you’re a saver looking for a place that pays higher interest than the bank, but still protects your principal and the interest you’ve earned from market loss, the alternative is pretty much coming down to fixed annuities. Although a fixed annuity is not FDIC insured, fixed annuity carriers have an excellent record of protection in both good and bad financial times. There are two main types.
 
A fixed rate annuity pays a locked-in interest rate for a specified number of years – anywhere from one up to ten. A fixed index annuity pays interest based on the performance of an independent index, usually linked to the stock market. Which is better? It depends.
 
With a fixed rate annuity you know what you’re getting. With a fixed index annuity if the index goes down you won’t earn any interest for that year (but you won’t lose what you have). However, the fixed index annuity often offers the potential for considerably more interest, so if the good years offset the bad they could pay much more interest. It ultimately comes down to whether you’re okay with seeing a zero in a given year.
 
Fixed annuities have penalties for early withdrawal called surrender penalties. For fixed rate annuities with multiple year interest guarantees the penalty period usually matches the guarantee period. Fixed index annuity penalty periods are usually for five to ten years. The early penalties are much higher than those imposed on certificates of deposit – so you shouldn’t buy the annuity if you think you’ll need to cash it in early – but you need to look at the entire picture, such as penalty fees.
 
This is a very tough time for savers. But this isn’t the time to quit the bank and start hunting exotic yield beasts that could come back to bite you. It is a good time to consider moving some of that money to the protected sanctuary of fixed annuities.