Fixed Index Annuity Income Rider Explained
An income rider is a feature of a fixed index annuity that allows you to turn your annuity into a guaranteed lifetime income stream. If you are considering a fixed index annuity for its income rider, it’s important to understand what income riders are and how they work.
Below we’re going to outline some of those most common questions and considerations about using an income rider to turn your fixed index annuity into a guaranteed income stream.
Fixed Index Annuity Rates
Can you get guaranteed lifetime income from a fixed index annuity?
Yes, this is possible, but you have to make sure you set your fixed index annuity up the right way.
When you purchase a fixed index annuity, you generally have to include an income rider to be able to get guaranteed income from it. Generally speaking, you have to include an income rider at the outset to turn your index annuity into a guaranteed income stream.
How does an income rider work?
Generally speaking, your annuity has two values: an accumulation value and a benefit value. Your benefit value is what is used to calculate how much income you receive from a fixed index annuity. For more details on the types of fixed index rates, see our FIA rate explainer.
When you purchase a fixed index annuity, there is generally a waiting period before you are allowed to turn on your income stream, often one year, though this varies by product.
During this waiting period, your accumulation value grows according to your market index, and your benefit value grows according to its own mechanism. Sometimes this mechanism is also the market index, and other times your benefit value grows at a guaranteed rate.
When you decide to turn on your income stream, the insurer will use the benefit value of your annuity, and apply an annuity payout rate to it. This payout rate is used to calculate how much money you will receive from your income rider each month.
How is the income from a fixed index annuity taxed?
Briefly, fixed index annuities pay out your earnings first. This means that your payments in your early years will likely be fully taxable (if you had earnings). Once your earnings are paid out, the insurer begins returning your original premium payment.
If your original premium payment was after-tax dollars (non-qualified), this should be tax-free. If your premium was something like a Traditional IRA (qualified), it will still be taxable. We have a few helpful tax articles you might find useful:
It’s also worth noting that after you live long enough that you get your full premium back from your income rider, your income will again become earnings and be taxable.
Can an income rider provide for my spouse too?
Yes, many income riders allow for both single life and joint life payouts. The way the insurer calculates your payout rate often depends on whether this is a single or joint life payout, and what your ages are when you turn on your income benefit.
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Do income riders cost money to include?
This is dependent on the particular fixed index annuity you are purchasing. Some will allow you to include an income rider free of charge, though it is more common that you will have to pay an annual fee to include an income rider with your annuity.
This annual fee ranges in cost, but is generally somewhere between 1% to 1.5% per year. As a result of this annual cost, an income rider means that your annuity can lose value in market downturns, even if your floor rate is 0%. It also effectively reduces your annuity's earning potential.
Are income riders a good idea?
Fixed index annuities are designed to include a lot of different features, among them are income riders. The main issue with the flexibility of a fixed index annuity is that, while it can accomplish many different things, it is often not the best at accomplishing any single goal, like providing lifetime income.
If your primary goal is getting lifetime income from an annuity, you may be better off with an immediate annuity or deferred income annuity. These are designed specifically for income, and generally have better payout rates and more favorable taxation of your income.
However, if flexibility is important to your retirement plan, an income rider might be perfect. Maybe you don't know when you will need to start your income stream, or if you will need it at all. Maybe you want some market appreciation while you figure out your income needs. A fixed index annuity with an income rider shines here because of its flexibility.
How do you compare an income rider against an income annuity?
If you are trying to compare getting a fixed index annuity with an income rider against a deferred income annuity, you probably will quickly realize how challenging it is.
In fact, you may not be able to do this by yourself. To make this comparison you need to know when your income will start, how the benefit value will grow, and what your payout rate will be.
Even with the necessary information, it can be complicated to untangle. We suggest you contact us or call our U.S.-based annuity experts at (866) 866-1999. We can help you compare how an income rider’s potential income stream may compare against a deferred income annuity. We can also walk you through the various trade-offs between the two.
The Bottom Line
Income riders are additions to fixed index annuities that allow you to turn your fixed index annuity into a guaranteed income stream. This income stream is calculated based on your benefit value as well as your age (or ages for two people).
Income riders need to be included when you initially purchase your fixed index annuity and may cost an annual fee to include (typically between 1% and 1.5%).
While income riders offer the flexibility to get guaranteed income, there are trade-offs. Other types of annuities, like deferred income annuities, often provide better income rates and more favorable taxation of your income, though with less flexibility.
What is an income rider?
An income rider is an additional benefit you can add to a fixed index annuity. It allows you to turn your fixed index annuity into a guaranteed income stream you can't outlive. Income riders are often optional and cost an annual fee.
How much does an income rider cost?
Generally speaking, income riders cost between 1% and 1.5% per year. However, this is dependent on the specific annuity, with some offering free income riders.
Are income riders a good way to get guaranteed lifetime income?
While income riders can provide guaranteed lifetime income, if that is your primary goal, there are often better options. Immediate annuities and deferred income annuities provide better tax distribution and often have higher rates than income riders provide.
Can an income rider start making payments immediately?
Generally, you have to wait at least one year to turn on your income rider. If you are looking for immediate guaranteed lifetime income, consider an immediate annuity instead. They can provide income in as little as one month, often have better rates, and are designed specifically for this purpose.
Does a fixed index annuity continue to grow while providing income?
No, generally they do not. Typically, once you turn on your income rider, you exit the accumulation phase (where your money grows) and enter into the guaranteed lifetime benefit phase (where you get regular income).
How does an income rider calculate my payments?
Generally, your income rate is calculated from the benefit value and a table of payout rates. Your benefit value is not an actual cash value, it is only used to calculate your income. The insurer applies a payout rate to your benefit value, which results in your income amount. It's important to understand the insurer sets both payout rates and how your benefit value grows, so understanding both is key to determining the performance outlook for your income rider.
