What Is a Hybrid Annuity?

A hybrid annuity is a retirement income investment that allows investors to split their funds between fixed-rate and variable-rate components. Investors can divide their savings between conservative assets that offer a low but guaranteed rate of return and riskier assets that offer the potential for higher returns. 

As in any annuity, the goal is to create a steady stream of income during retirement.

Understanding the Hybrid Annuity

A hybrid annuity gives investors more options for investing than a standard annuity. Their design allows a portion of an investor’s money to be placed in a mutual fund sub-account. The remainder is kept separate in order to guarantee payment of a set amount after retirement.

Other hybrid contracts may pair a fixed annuity with an indexed product in an effort to better protect the principal in both segments.

As in any annuity, hybrids can begin paying out immediately or be deferred with fixed or flexible premiums.

Among their positives, hybrid annuities offer the possibility of increasing the investor's income and hedging the assets against inflation. The mix of fixed and variable components lowers the downside risk.

As for negatives, the dual framework adds complexity to these products, which is a deterrent for many investors. Hybrid products also may have higher fees.

In fact, most annuities provide growth and income. That is, nearly all variable and indexed annuity products today come with guaranteed income riders. That somewhat negates a major selling point of hybrids.

Target Market for Hybrid Annuities

Hybrid annuities can be useful for those who have longer time horizons. In general, annuities are appropriate for investors seeking stable, guaranteed retirement income. Annuity holders cannot outlive the income stream, which removes longevity risk.

Notably, the lump sum deposited into the annuity is not liquid. It is subject to withdrawal penalties. Annuities are not recommended for investors who may need access to their cash.

Some investors also may look to cash out an annuity at a profit, although that is contrary to the investment strategy behind these products. 

As with any investment, an investor’s risk tolerance should be considered before making an annuity purchase.