For retirees, the most attractive feature of fixed annuities is the assurance that it will provide a fixed income for life (in the case of annuitization). The other popular feature is the flexibility to annuitize (take regular payments) or a lump sum or distributions when desired. But all investments have their good and bad points; and fixed annuities are no different. Let's overview some of the annuities pros and cons as summarized in the table.
Pros of Annuities
The three "pro" features of annuities pros and cons are tax-deferred accumulation, guarantee of principal, and guaranteed lifetime 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 but of course you should always check out the strength of any insurance company you are considering buying from. These ratings are easy to obtain on the Internet or from an agent.
With the guaranteed life income payout option, you do not have to worry about market downturns that could rob you of income as your income is fixed. Also if you can put off your payout until later in life, your monthly payout will increase not only from increased earnings accumulation but from your reduced life expectancy of being older.
Cons of Annuities
The "most often sited "con" of annuities pros and cons is seeming illiquidity. 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 59½.
Also, annuity surrender charges (early withdrawal penalties) can significantly cut into any withdrawals taken early in the accumulation years. So plan on holding your annuity to the end of its term so you never have any surrender charges.
Another negative in the list of annuities pros and cons is lack of control. 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. One of the oft-mentioned in a list of fixed annuities pros and cons is that the income is fixed and will not increase. Of course, nether will it decrease below the guaranteed rate and 'CD Type' annuities do provide interest rate guarantees that can span several years.
Although with a fixed annuity you have eliminated the possibility of market risk on your investment you have created the risk of losing purchasing power. After beginning payments to you, you are not able to make any adjustments in case of higher inflation rates.
Last in the list of less favorable column of annuities pros and cons is the potential lack of benefits for heirs. If you decide to annuitize (not an option you must take), 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 for you. Of course, chief on the list of annuities pros and cons is the fact that you choose how to take your money out based on your personal desires.
There you have coverage of the major annuities pros and cons to discuss with your financial professional and help you make a decision.