Advantages and disadvantages of annuities

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If you have been putting money aside for occupational or personal pension. Because, process after you retire is not as simple as withdrawing money. An annuity is financial option which allows you to convert your pension into retirement income for rest of your life. There are advantages and disadvantages of this option. Hence, see procedure for withdraw money.

Advantages of an Annuity

Annuities are very unique products. That many investors utilize for retirement savings. Of course, with any investment product advantages will change depends on product. You can choose as per situation. And you will be able to access your private pensions as you wish from point of retirement. There are number of proposed changes to tax rule to allow annuities to become more flexible. In general, some of advantages that annuities can provide are.

Guaranteed Regular Income

You have guaranteed regular income for rest of your life. Perhaps great benefit of an annuity is that you will have reliable income source guaranteed each month. It is low risk and will not be subject to stock market fluctuations as other investments.

Tax Deferral

Annuities are only products available that maintain complete tax-deferred status.  Any money you invest in an annuity grows tax-deferred until it is taken out.  Unlike other products, there are no limits on contributions to your annuity. So any new money that you invest will grow tax deferred until you withdraw.  In addition, there are no phases out schedules that apply to contract owners. Hence, It is tax paid.

No Losses during Market Downturns

If you are purchased product like fixed index annuity. Your retirement savings under your annuity contract are protected from stock market losses.  Since your money is tied to an index like S&P 500, rather than invested in market directly. If stock market crash also your money is not at risk.

Account for Inflation

As prices rise each year due to inflation value of your income this year is not same as next year. There are annuity options which will increase in value each year to account for this inflation. This will help you when planning your budget to help you to live comfortable retired life.

Increase for Care Requirements

There are annuity options available which will pay out higher income than standard annuities. If you are not well and require health care. This can result in an increase of up to 65%.

Disadvantages of Annuities

Many annuities sound like great moneymakers. But there are often hidden fees that cut into profits. It is important to understand that all annuities are not created equal. Investors must consider drawbacks of certain types of annuities when purchasing an annuity. An annuity expert can assist an investor in understands these drawbacks and how they might apply to your unique financial situation and goals. Some of drawbacks of annuities are as follows:


For starters, most annuities are sold by insurance brokers or other sales people. They will collect commission that can be steep as much as 10% or so on.

Surrender charges.

You decide to pull out of your annuity within first few years. And, you are likely to be hit with surrender charges. But surrender charge runs about 7% of your account value if you leave after one year.  Generally, fee declines by one percentage a year until it gets to zero after seven or eight years. Note that some annuities come with high surrender charges up to 20% in first year.

High annual fees

If you invest in variable annuity you will also come across high annual expenses. Always read fine print on contracts and work with an advisor you trust. And you know 100% is looking for your best interest.

Another potential disadvantage is high annual fees. If you invest in variable annuity. Annual insurance charges can cost of 2%, which can take away from retirement. That can take huge bite out of your retirement nest egg.  In some cases even cancel out some of benefits of an annuity. It is important you to work with reliable and experienced professional. To help you pick right annuity for your retirement.

No Family Support

If you have invested all of your pension savings into you annuity. Then your agreement lasts until you pass away. Once you have gone your family will not receive any of money you have left behind as it will all go to annuity provider.

Early Withdrawal Penalties

Depend on your contract terms your annuity charge penalty up to 10% for early withdrawal. If you withdraw before age of 59 1/2.  This penalty can be in addition to penalties charged to you under your contract for withdrawing early.  There may additional penalties for not withdrawing by certain age. But these will be depend contract you purchased.

Do all annuities have high fees?

Some investment companies sell annuities without charging sales commission or surrender charge. These are called direct-sold annuities. Because, an annuity sold by traditional insurance company. And there is no insurance agent involved. With agent there is no need to charge commission.

Are there tax benefits to annuities?

Money that you invest in an annuity grows tax-deferred. When you finally make withdrawals, amount you contribute to annuity is not taxed. But your earnings are taxed at your regular income tax rate.

Finally, check annuities how it works. Therefore see annuity benefits. But for more details see uses of annuity. Probably, check benefits of fixed or fixed index annuity. For more information hence view how company will honor your future payments.

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