Purchasing a Fixed Indexed Annuity as a US Expat: An Overview

However, the fixed payments associated with standard annuities may not account for future economic conditions, which can erode your purchasing power and weaken cash flow over time.

A fixed indexed annuity is designed to mitigate this risk to a limited extent by linking interest crediting to an external market index. This article explains how fixed indexed annuities work and outlines the key factors to evaluate before purchasing one.

What Is a Fixed Indexed Annuity?

A fixed indexed annuity (FIA) is typically a deferred annuity issued by an insurance company that credits interest based on the performance of a specified market index (such as the S&P 500).

Although you do not directly invest in assets, you may receive credited growth when index performance is positive. However, the growth is typically more limited than if you invested directly, as the insurer sets limits on the amount of index-linked interest that may be credited.

In exchange, many FIAs include downside protection features, often a floor on index-linked interest crediting for a given term, so negative index performance typically does not result in negative credited interest. The floor is commonly 0%, although in some cases insurers may offer a modest guaranteed minimum rate, subject to contract terms and the insurer’s claims-paying ability.

From the standpoint of US federal tax, annuity earnings are generally tax-deferred until distributed (through withdrawals or annuity payments).

This tax deferral may enhance after-tax retirement income for some individuals, depending on withdrawal timing, applicable tax rates, and the tax rules of their country of residence. The overall tax outcome for US expats may still depend on the tax rules in their country of residence and the specific contract terms.

How Does a Fixed Indexed Annuity Work?

After you purchase a fixed indexed annuity, the insurer monitors the selected stock index over a specific period (typically one year) and credits interest according to predefined crediting methods and performance limits.

Although crediting methods may differ between insurers, they are typically divided into three categories:

To ensure predictable interest crediting and support previously credited interest, insurance companies utilise three primary performance limitations:

• Cap rate: The maximum interest percentage your annuity can earn, regardless of index performance.
• Participation rate: The percentage of the index’s gain that is credited to your annuity. For instance, if the index increases by 20% and your participation rate is 70%, you will receive a 10% return.
• Spread: A set percentage subtracted from any positive index returns.

Regardless of the specific crediting structure, negative index performance generally does not result in negative credited interest.

However, withdrawals, surrender charges, inflation, and the insurer’s claims-paying ability may still affect overall outcomes. Depending on the floor your insurer sets, you may even earn a modest return during market downturns.

During the accumulation phase, your annuity will grow based on the applicable crediting terms. You will then enter the annuitisation or distribution phase, when the insurance company begins making payments.

Although the annuitisation date may precede your retirement, it is generally not advisable to withdraw annuity income before turning age 59½. Doing so may trigger a 10% US federal early withdrawal penalty on the taxable portion of distributions, unless a specific IRS exception applies.

What Are the Benefits of Fixed Indexed Annuities?

The primary benefit of fixed indexed annuities is income stability and predictability, combined with growth potential that a standard fixed annuity does not provide.

Additional arguments in favour of purchasing fixed indexed annuities include:

• Investments with principal protection: In contrast to direct investments in the stock market, a fixed indexed annuity generally limits exposure to market losses by preventing negative index-linked interest crediting. Regardless of market performance, negative index-linked returns typically do not reduce credited interest, while annuitised payments remain subject to contract terms and the insurer’s claims-paying ability.
• Tax deferral: Annuity earnings accumulate on a tax-deferred basis until withdrawal, which can be a significant benefit for US expats, as the IRS imposes taxes on the worldwide income of US nationals.
• Currency flexibility: In limited cases, typically involving non-US or international insurers, annuities may allow premiums or payouts in currencies other than USD. Availability varies significantly and may introduce additional tax and reporting considerations for US citizens.

While fixed indexed annuities can reduce exposure to market volatility, they also introduce other considerations, including insurer credit risk, inflation risk due to return caps, complexity of crediting formulas, and opportunity cost if equity markets perform strongly over extended periods.

Inflation Risk and Purchasing Power Over Retirement

While fixed indexed annuities can reduce exposure to market volatility, they may not fully protect purchasing power over long retirement periods.

Return caps, participation limits, and fixed crediting structures can cause income growth to lag inflation, particularly during prolonged inflationary environments or periods of sustained price increases.

For US expats, this risk may be amplified when retirement expenses are incurred in a foreign currency, especially where exchange rate movements compound domestic inflation pressures.

As a result, fixed indexed annuities are often most effective when used alongside other assets or income sources that provide longer-term inflation sensitivity or currency diversification within a broader retirement income strategy.

Is a Fixed Indexed Annuity a Good Investment: Key Factors To Consider

An FIA may be a sound investment in periods of market volatility due to its combination of index-linked downside protection features with limited exposure to equity market performance.

As a result, it is often favoured by expats who prioritise capital preservation and income stability rather than maximising returns.

However, FIAs may not be an ideal solution for all retirees. Before purchasing a fixed indexed annuity, you must consider several factors to determine its suitability:

1. Accessibility
2. US state regulation and provider eligibility for expats
3. Taxation and reporting requirements
4. Liquidity constraints
5. Features and riders
6. Coordinating a fixed indexed annuity with US Social Security
7. Familiar and hidden costs

Accessibility

Acquiring an annuity while living abroad may be challenging due to insurer underwriting policies and cross-border regulatory constraints.

Such purchases are typically considered non-resident sales (NRS), and conditions may vary between insurers. For instance, having a foreign mailing address or bank account may lead an insurer to decline a new application or restrict ongoing servicing of an existing contract.

Due to these limitations, US expats often acquire annuities via specialised financial advisers or brokers with experience working with insurers that service US citizens abroad. Even then, you may need to satisfy requirements such as:

• Having a US tax identification number (TIN)
• Maintaining a US address
• Funding the account in USD

To understand the requirements and address the challenges of obtaining an annuity as an expat, contact Titan Wealth International for support. Our team of financial advisers can assist in identifying suitable options and integrating them into your broader retirement plan.

US State Regulation and Provider Eligibility for Expats

Fixed indexed annuities issued by US insurers are regulated at the state level rather than federally. As a result, availability for US expats often depends on the state in which the annuity is issued, the insurer’s underwriting policies, and whether the selling agent is licensed in the relevant state.

In practice, many US expats acquire annuities based on their last state of US residence, a maintained US address, or another qualifying state connection accepted by the insurer.

Some states impose additional consumer protection and disclosure requirements, which may affect product availability, rider options, or contract features.

Because state insurance rules and carrier policies vary materially, availability should not be assumed based solely on US citizenship. Expats should confirm state eligibility, servicing requirements, and long-term portability before committing to an annuity contract.

Taxation and Reporting Requirements

Regardless of your country of residence, your FIA generally remains subject to US taxation if you are a US citizen or green card holder.

Many annuities provide US tax deferral during the accumulation phase, meaning earnings are generally not taxed for US federal income tax purposes until they are distributed.

When distributions begin, the taxable portion is typically treated as ordinary income. However, depending on your investment in the contract (basis), part of each annuity payment may be treated as a non-taxable return of principal.

Certain non-US annuities may not qualify for US tax deferral if they fail to meet IRS requirements for annuity treatment, potentially resulting in current taxation of earnings.

Once annuitisation begins, you must report annuity income on your US tax return as worldwide income. If the annuity is held with a non-US financial institution or otherwise constitutes a specified foreign financial asset, you may also need to submit Form 8938 under FATCA.

In addition, certain foreign annuities may be reportable under the FBAR if they are considered foreign financial accounts and the aggregate value of all foreign financial accounts exceeds the annual reporting threshold. FBAR reporting is separate from your tax return and applies regardless of whether the annuity generates taxable income in a given year.

International reporting and cross-border taxation do not necessarily mean you will pay tax twice on the same income. The US has a number of double tax agreements (DTAs) that allocate taxing rights and provide relief mechanisms to mitigate double taxation.

Because DTA treatment and reporting requirements vary materially, US expats should review the relevant treaty provisions and seek professional tax advice before purchasing an annuity or commencing distributions.

Liquidity Constraints

A key characteristic that FIAs share with other annuity types is illiquidity during the accumulation phase. Insurers typically apply a surrender period lasting between five and 10 years. During this period, withdrawals above a limited free allowance may be subject to surrender charges.

Surrender charges generally depend on:

1. The amount withdrawn
2. The timing of the withdrawal (earlier withdrawals usually incur higher charges)

Certain contracts include crisis waivers that may permit penalty-free withdrawals in limited circumstances, such as:

• Terminal illness
• Nursing home confinement
• Disability

Given the unpredictable and adverse nature of these events, annuities should not be relied upon as a source of emergency liquidity. Surrender charges and the loss of future growth may outweigh the benefit of early access.

For this reason, it is prudent to maintain other savings or liquid assets as a liquidity buffer. An annuity is best treated as an income-planning tool within a diversified retirement strategy.

Despite surrender charges, surrendering a US annuity is generally more flexible than unwinding an annuity purchased in jurisdictions such as the United Kingdom. UK annuities are typically irreversible once purchased, with only limited statutory exceptions, resulting in significantly more constrained post-purchase flexibility.

Features and Riders

You may customise your annuity through various riders before entering the contract, allowing a degree of adaptability to align the annuity with your retirement objectives.

Common living benefit options include:

Although living benefits are often emphasised, death benefits can also be relevant, particularly where annuities form part of a broader estate plan. FIAs commonly include a guaranteed minimum death benefit payable to beneficiaries upon the annuitant’s death.

The death benefit is typically the highest of:

1. Annuity value on a specified date.
2. Annuity value at death.
3. Premiums paid, less withdrawals.

Any additional riders increase the cost of the annuity, so their value should be assessed in light of overall objectives and alternative planning options.

By ensuring your FIA contains a death benefit, you can include it in estate planning to equalise inheritance among dependants or beneficiaries.

However, any living or death benefit you include will likely increase the cost of the annuity, so you must first determine the financial sensibility of your selected riders.

Coordinating a Fixed Indexed Annuity with US Social Security

Many US expats use fixed indexed annuities to complement US Social Security rather than replace it. An annuity may provide income during early retirement years, allowing individuals to delay claiming Social Security benefits and potentially increase lifetime payments.

When coordinated effectively, Social Security and annuity income can form a predictable baseline of retirement cash flow.

However, both income sources remain subject to US tax rules, and annuity income may affect the taxation of Social Security benefits by increasing provisional income thresholds. This interaction should be reviewed as part of a broader retirement income strategy.

Familiar and Hidden Costs

Before purchasing an annuity, insurers typically disclose contract-level charges, which may include:

• Administrative fees
• Surrender charges
• Mortality and expense (M&E) fees

Beyond contract charges, additional costs should also be considered. If annuity payments are received in a currency different from that of your country of residence, exchange rate movements may reduce effective income.

US expats may also incur costs for tax filing and cross-border compliance support. While professional advice can reduce the risk of costly errors, these fees should be factored into long-term planning.

Finally, receiving annuity income overseas may involve international banking and wire transfer fees, which can accumulate meaningfully over time.