Indexed annuity

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Indexed Annuity

An annuity with an interest rate linked to the performance of some index. Most annuities pay the interest rate stated in the contract, but an indexed annuity pays a minimum interest rate (which may be 0%, but never lower), with the possibility of a higher rate depending on the performance of the relevant index. Each plan uses a different methodology in determining how the higher interest rate is calculated. Common features in its calculation include a participation rate, which determines how much of the annuity is linked to the index, and the rate cap, which sets a maximum interest rate on some plans. Many index annuities use the S&P 500 as their benchmark.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Indexed annuity.

An indexed annuity is a deferred annuity whose return is tied to the performance of a particular equity market index.

Your investment principal is usually protected against severe market downturns, in that you may have an annual return of 0% but not less than 0%.

However, earnings are generally capped at a fixed percentage, so any index gains that are above the cap are not reflected in your annual return.

Indexed annuity contracts generally require you to commit your assets for a particular term, such as 5, 10, or 15 years. Some but not all contracts limit your participation rate, which means that only a percentage of your premium has a potential to earn a rate higher than a guaranteed rate.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
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The final DOL rule also eliminates two disclosure requirements that many felt would be overly burdensome, especially with respect to index-linked annuity products: the requirement that advisors provide one-, five- and ten-year projections to clients and the annual disclosure requirement.
"Those who may have been tempted to buy a level annuity during recent times of low inflation, rather than an index-linked annuity, may now see the value of their income being eroded by higher inflation," Richardson at Towry said.
However, for those buying pensions with their own funds, inflation protection comes at a high price: an index-linked annuity typically means an income which starts around a third lower than one which will always remain the same (and so must always shrink in real terms if we don't buy the deflation argument).
But if inflation keeps rising, the increased price of living may mean an index-linked annuity, which rises in line with inflation, is a better bet.
As well as the lump sum payment, Marc Rayment will also receive a tax- free, index-linked annuity of pounds 50,000 a year, for as long as he lives.
A man buying a standard, non index-linked annuity at the age of 60 could get an average payout of just pounds 622 a year for every pounds 10,000 of pension he had, the highest level since December 2001, but well down on the pounds 883 per year per pounds 10,000 he could have got in December 1997.
In effect, the fund aims to match the sort of payouts that new retirees might expect from an index-linked annuity but without having to sacrifice their capital.