Pros and Cons of Fixed Annuities
For retirees, the most attractive feature of fixed annuities is the assurance that it’ll provide a fixed income for life. But all investments have their good and bad points; and fixed annuities are no different. Let’s overview some of their advantages and disadvantages summarized in the table.
Advantages
The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income. The tax-deferred accumulation – in comparison to a similar taxable investment – allows for greater accumulation since earnings are not taxed away annually.
Annuities have been conservative vehicles for investment. Of course you should always check out the strength of any insurance company you’re considering buying from. A good source is to get the Comdex rating of 80 or better from Vital Signs (see a financial professional) or a Weiss rating of B or better.
With the guaranteed life income payout option, you don’t have to worry about market downturns that could rob you of income. Also if you can put off your payout until later, you’re monthly payout will increase not only from increased earnings but from your reduced life expectancy.
Disadvantages
Because an annuity is a long-term investment with tax-deferred status, the IRS will levy a 10% excise tax penalty on any withdrawal before age 59 ½.
Annuity fees can significantly cut into any withdrawals taken early in the accumulation years. So plan on holding off for 10 years or so to let your earnings offset this effect.
Since your money is placed with an insurance company in an annuity contract, you have little control over the rate of return on your investment. When you buy, find a company that has a history of providing competitive returns If you ask for the interest rate history, you will get it).
Although with a fixed annuity you’ve eliminated the possibility of market risk on your investment you have created the risk of losing purchasing power. After beginning payments to you you’re not able to make any adjustments in case of higher inflation rates. However, if the rate history looked good, the company may be more reactive to raising rates when possible.
Choosing a lifetime income leaves generally leaves no residual investment for your heirs. You can choose options that remedy this, but at the cost of a lower monthly payout.
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Fixed Annuities – Pros and Cons |
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Advantages |
· Tax-deferred earnings · Assurance of lifetime income · Not subject to market downturns · Longer deferred gives greater payout per month |
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Disadvantages |
· Early (before 59 1/2) withdrawals are penalized at 10% of withdrawal · Withdraw too soon after contributing can bring high fees and · Purchasing power of fixed payout can be degraded by inflation · Lack of benefits to heirs |
Annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty. Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.
More: annuity pros and cons
–Bob Richards
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Great post..A friend told me about this page. I’ve been looking Annuities for a while. It’s good to get a breakdown of all the pluses and minus’. I think they are important part of anyones portfolio. The only thing I don’t like is the penalty for withdrawing early. With the stock market looking unappealing whilst the financial crisis takes hold.. annuities are ideal for many I think.
Thank you for the presentation about annuities. This sounds like something to use when you are getting older, say 50+. For one thing you do not want to pay the 10% penalty, so this should be money that you do not intend to touch. Plus beyond 60, there is absolutely no need to be exposed to the vagaries of asset prices, better make what you have as safe as possible, so you can travel, see you grandchildren, and spend time with hobbies. This is a life.
It is very encouraging that with the guaranteed life income payout option I don’t have to worry about market downturns, and I really like this fact! The only thing that I worry about is that I am 55 now, and I would like to retire earlier. I do not want to wait until I am 59 1/2. But in order to retire, I need my money. But, at the same time, I can’t get my money without losing a signifacant part of it. So – what is the solution?
The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income. The tax-deferred accumulation – in comparison to a similar taxable investment – allows for greater accumulation since earnings are not taxed away annually.
I’ve already begun to save for my retirement. I’ve discussed some of these annuities with my financial adviser and he suggested I look into diversifying my portfolio to maximize my return. I know I am more than 20+ years away from retiring, but I it’s never too early to beign saving for your golden years.
Even though there are quite a few negatives, I would definitely opt for a fixed annuity because it is less of a risk than investing in the stock market and I would go with a safer option rather than a risky one.
I agree, fixed annuity was my choice too due to the low risk factor. I once risked a large some of money in other options, lived to regret it.
It’s a nice overview it would help if you would have added typical annuity return rates.
A fixed annuity can be a great investment, especially in this economy. The interest rates on annuities have not depreciated as much as bank cd’s and other “low risk” investments.
there are many pros and cons to an annuity but it really comes down to your specific situation. many people get an annuity with the plan of receiving payments throughout retirement. but things happen and if you ever need immediate cash, you can sell your annuity for a lump sum payment. it’s good to have options.
Witht he state of the market as it is I think the benefits of a fixed annutity outweigh the negatives. Sure, it may be a conservative option but at least your money is safer.
Fixed annuities have their pros and cons but at the moment can they compete with a structured investment? Structured investments are insured by the FDIC and follow the stock market offering great returns. Whats your thoughts on the comparison?
Annuities once annuitized cannot be surrendered for value. Income from deferred annuities is taxed as ordinary income fashion and withdrawals prior to age 59 ½ are subject to a 10% penalty.
Awesome article again. The best site I’ve come across to help me prepare for my retirement. Thanks a bunch. Cheers
I did not know annuities once annuitized cannot be surrendered for value. Thank you for teaching me somthing new! Good post.
Very helpful post. In my opinion the Pros of fixed annuities are stronger than the Cons.
An important factor is that of tax liability. In case of tax deferred fixed annuities, the earnings within the annuity are not subjected to taxability until they are withdrawn. This may offer its own advantages, like tax control, along with a higher potential for growth
Thank you for a comprehensive overview of all PROs and CONs, it definitely inspired me to do more reading on annuities.
Many people get an annuity with the plan of receiving payments throughout retirement. Even though there are quite a few negatives, I would definitely opt for a fixed annuity
If one is worried about the risk of inflation, yet, wants the stability of a guaranteed return similar to a traditional fixed annuity, then an equity-indexed annuity may be a good option. It is tied into an index like the S&P 500, and provides rather exceptional returns compared to a traditional fixed annuity when there is a rising market. However, if the market were to fall, your annuity would not lose value. In fact, they have a no loss clause, stating that no matter what happens to the market, your money is guaranteed. A safe investment vehicle with a no loss clause that can pay a percentage of a climbing market, would be a good alternative to a fixed annuity, if inflation was a concern. This is why it is important to check the financial strength ratings of the carriers you are considering.
Jason Hawkins
Owner
The Koenig Group LLC
In case of tax deferred fixed annuities, the earnings within the annuity are not subjected to taxability until they are withdrawn.
Thank you for a comprehensive overview of all PROs and CONs, it definitely inspired me to do more reading on annuities.
An insurance contract in which the insurance company makes fixed dollar payments to the annuitant for the term of the contract, usually until the annuitant dies. The insurance company guarantees both earnings and principal
The best site I’ve come across to help me prepare for my retirement. Thanks a lot..
Talk to an expert on annuities or structured settlements depending on your situation.
Even though there are quite a few negatives, I would definitely opt for a fixed annuity because it is less of a risk than investing in the stock market and I would go with a safer option rather than a risky one.
our annuity would not lose value. In fact, they have a no loss clause, stating that no matter what happens to the market, your money is guaranteed.
I did not know annuities once annuitized cannot be surrendered for value.
Structured investments are insured by the FDIC and follow the stock market offering great returns. Whats your thoughts on the comparison?
I did not know annuities once annuitized cannot be surrendered for value. Thank you for teaching me somthing new! Good post.
I’d like to add some more advantages of fixed annuities:
-Low investment minimums ($1,000-$10,000 usually)
-Low risk (money can be lost only if insurance company is insolvent and investment exceeds annuity state guaranty limits)
-Unlimited contributions (unlike a 401(k) or IRA)
The safer option is always better, this is why i would go with fixed annuities rather than other options. Thanks for a clear list of advantages and disadvantages! G.
“Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.”
is it me or does that 10% penalty seem pretty harsh?
Should you own fixed annuities? Here’s a casual discussion of the pros and cons of a fixed annuity.
I would definitely opt for a fixed annuity because it is less of a risk
What a great article that makes fixed annuities a lot easier to understand. In this economic environment, this information will most likely be helpful to many different people.
helpful post. In my opinion the Pros of fixed annuities are stronger than the Cons
I am really confused about annuity..I have a problem. I am a Manulife Income Plus customer with PART of my portfolio invested with Income Plus. From what I am told:
My initial investment will attract a 5% bonus in the GWB each year I dont touch it until I am 65 when I can begin withdrawing 5% a year from GWB — so for simple math … an initial $100K left in for 15 years will have a GWB of $105K after year1, $110K after year 2, $115k after year 3 etc with an ultimate GWB of $175K after 15 year — I then can withdraw a guaranteed income for the rest of my life. This is if the markets go down and show no improvements. Manulife will RESET the GWB every 3 years if the market has improved the value of your original $100K. As I said at the outset, this is a PART of a retirement portfolio and provides what I like to think of as a “pension” that can be banked on. Am I wrong? Could you explain tome, please?
Definitlely a good tool for the retirement planner. I would like to read some tips on finding and evaluating companies that offer this vehicle.
Enjoying reading here even i don’t really understand about annuity till i reads here
This is great. I have ready quite a few blogs that discuss annuties and mainly the benefits, but this is probably the best one I have read that puts across both the pros and the cons in a way that a layman can understand it. Really good.
good post. good for newers who will start annuity soon. Hope to have some more
Fixed annuities are the best source to invest money.The safety factor is the biggest pro but on the other hand it doesn’t offers much returns.
I think fixed annuities are one of the best way to save money for future instead of having different ways to do the same. Every thing has some pros and cons. I know fixed annuities are more secure. Thanks for sharing some disadvantages and benefits. Keep sharing.
I stumble onto this page by accident and it is a good thing I did. This site goes in depth about Annuities but still explain it in a term that everyone can understand.
thanks for the great share…
good for newers who will start annuity soon. Hope to have some more
Anyone who is interested in a fixed annuity should read this post for it will help this decide if it is really what they want.
Thank you informing us more about annuities. This is such a complicated topic but this article really shows the things that are involved.
Thank You dear Admin
In france Fixed Annuities are the most prefered investement, its what we call “assurance vie” ie: life insurrance (despite the fact this name is completly meanless).
So people dont suffer a lot about stock crysis and dont care a lot about what stock market does.
good annuities….. good old day…
GOOD POST !!
I agree, Fixed annuities fixed my choice is also due to lower risk factors. which I never bet most of the money in other options, but none lived to regret it.
good post.
I am new to annuities investment. This certainly seems like a reasonably safe investment choice.
I would also opt for a fixed annuity because it is less of a risk than investing in the stock market and I would go with a safer option rather than a risky one.
I prefer fixed annuity too due to the low risk factor. But the gain is also less.
Ineed to do something like this, dur to the recession my pension went bankrupt and now i have lost 10yrs worth of my pension scheme. Im getting on a bit now so i have to do something like this. Thanks for the tip much appreciated thanks Bob
Fixed Annuities are great investments. Be sure to consult with someone you fully trust and make sure you ask as many questions as you can so you are satisfied with the answer.
The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income. The tax-deferred accumulation – in comparison to a similar taxable investment – allows for greater accumulation since earnings are not taxed away annually.
Annuities per sea are a very complicated subject and the choices which you make at this time will have a profound impact to your future in terms of income given the ‘one time’ selection you have to make. I personally can only suggest that anyone whom is pending retirement MUST take independant financial advice before deciding upon anything because, as I said, the choices you make at this time will effect your future enourmously and are irriversable.
As I’m rather risk-avers I actually prefer fixed annuity. And as it has already been pointed out, you should definitly consult someone who you really trust if you decide to work with stocks.
Investing in annuties does not get much publicyt and many times overlooked, even though they are a very sound investment vehicle.
It’s nice overview article, Perhaps fixed annuity is my preference as the reason of low risk factor and I think that fixed annuity is great and right investments plans for long term.
i think fixed annuity is what i would prefer because of the lower risk!
Every thing has some pros and cons. I hope fixed annuities are secure. Thanks for sharing some disadvantages and benefits. Keep sharing.
I have always been a short term / swing trader, so didn’t really pay much attention to annuities. Apparently I didn’t understand them either, you made quite a few things clear.
Those who hold an annuity insurance license will certainly tell you that fixed annuities are secure and will supply the investor with a guaranteed income for life upon their annuitization, but does not provide a hedge against inflation, as skillfully mentioned in this article. In my opinion, this is the greatest disadvantage in owning a fixed annuity. However, an investment portfolio should be diverse, and when this is the case, there are other investment vehicles that can offer a hedge against inflation, such as common stock or mutual funds, while a fixed annuity will provide a conservative, yet guaranteed rate of interest on an investment.
My wife and I decided a few years ago to invest in a fixed annuity with a 10-year life span. After 4 years, we’ve made a 13% gain through an option that allows you to apportion your investment to the Dow Jones, S&P 500, Nasdaq or simple low interest. The first year of the annuity guaranteed us 10% interest, no matter what (as per Allianz).
The advantage of investmebt is to manage your risk better. In our case, we sleep better at night knowing that our risk is minimal to non-existent. A big plus is that we don’t pay taxes on the gains until the end of the contract, and even then we may opt to receive monthly payments instead of a lump sum. We will pay a regular income tax, however, when we withdraw a certain amount every year (up to 10%), but that of course depends on when we do choose to withdraw.
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Every thing has some pros and cons. I know fixed annuities are more secure. Thanks for sharing some disadvantages and benefits.
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This is generally a good idea, but I would make sure you have some saved in another place as well for those rainy months where your annuity payment is just not enough.
Although there seem to be disadvantages I think that they are more or less irrelevant. When you save to a tax deferred account you have to think of the money as being spent or at least not as something that you can fall back on. If you can do that then the deferred tax nature of the account is greatly advantageous to your future self.
If you are putting money into this annuity, be fully aware that there will be a penalty for taking it out before age 59.5. However, these things cannot always be predicted. Do the best you can, and the money will always be there regardless.
Annuity fees can significantly cut into any withdrawals taken early in the accumulation years.
a lot of our buyers have struggled with this, but if they play it smart, the investments really pay of
I think with a fixed annuity you have to look at the long term investment prospect. Early withdrawal brings about less favourable financial returns.
Fixed annuities feature guaranteed returns. During the accumulation phase of an annuity contract, the insurer guarantees a minimum rate of return.
[...] is not massive and the potential returns are impressive. For those with more capital, consider the pros and cons of fixed annuities. They offer good tax breaks and ongoing income. As with all investment products there are pros and [...]
I personally can only suggest that anyone whom is pending retirement MUST take independant financial advice before deciding upon anything because, as I said, the choices you make at this time will effect your future enourmously and are irriversable.However, an investment portfolio should be diverse, and when this is the case, there are other investment vehicles that can offer a hedge against inflation, such as common stock or mutual funds, while a fixed annuity will provide a conservative, yet guaranteed rate of interest on an investment.
Thank you for telling us about annuities, I would prefer fixed annuity simply because it has lower risks!
Fixed Annuities have more advantages then disadvantages.I hope fixed annuities are secure. Thanks for sharing some disadvantages and benefits. Keep sharing.
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