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  • Writer's pictureDamon C Collins, MBA, AAMS®, CFEI®

The Pros and Cons of Annuities: An Analysis for Informed Decision-Making.

When it comes to retirement planning, annuities can be a valuable tool. They can offer a steady stream of income, which can be crucial for individuals seeking financial security after they stop working. Annuities also provide other benefits, including growing your money tax-deferred and protecting assets from market volatility.

There are many different types of annuities, each designed to deliver other benefits. And today, a new breed of annuities is known as "commission-free" or "no-load." These products are lower cost and often offer improved benefits over their more expensive predecessors.

Like all financial products, annuities have some potential drawbacks, so it is essential to carefully consider the pros and cons before purchasing one.

In this blog, we'll explore the advantages and disadvantages of annuities to help you make an informed decision based on your unique financial goals and circumstances.

Annuity Basics

An annuity is a contract between you and an insurance company designed to pay a steady income stream for a fixed period or for life. When purchasing an annuity for income, you make a lump-sum payment or a series of payments to the insurance company. The insurer then invests your money and, when ready, pays you a regular stream of income that can start immediately or many years later, depending on your needs.

Pros of Annuities

Annuities have been around for a very long time. Their use can be traced back to the Roman Empire, and they have been used in the U.S. for more than two hundred years. The popularity of annuities continues to grow today due to the many benefits they offer:

Guaranteed Lifetime Income

Annuities are designed to provide a secure income stream guaranteed to last as long as you live, ensuring you have a reliable source of funds to cover essential expenses throughout your retirement. As traditional pensions disappear and individuals seek ways to convert their lifetime savings into retirement income, annuities are often purchased as a "personal pension." Depending on the type of annuity you choose and other factors — where you live, how old you are, when you plan to retire, how much income you need — you can secure income that remains steady or rises annually, increases to help cover health-related expenses, and more.

Income Efficiency & Risk Pooling

Leading economists and retirement researchers have long agreed that annuities are the most efficient way to fund retirement income. Retirement researcher Wade Pfau states, "Risk pooling with an income annuity can support a higher level of lifetime spending compared to bonds." For this reason, many purchase annuities as a bond alternative to generate efficient, predictable income they can count on for the length of their retirement, a benefit bonds cannot provide.

Tax Advantages

Annuities offer tax-deferred growth, which means you aren't taxed on the interest you earn while your money is in the annuity. You don't pay taxes until you begin taking income payments, which can help your retirement savings grow faster. This can benefit individuals looking to accumulate wealth over time, as annual taxes allow the principal and earnings to compound without being diminished.


Annuities come in various forms, allowing you to choose features and benefits that align with your specific needs. For example, fixed annuities are straightforward products that provide a predetermined interest rate for a set period, enabling your money to safely and predictably grow with tax deferral. Variable annuities offer the potential for higher returns by investing in a range of investment options, allowing you to participate in market gains but also market losses. Other annuities offer market participation with complete or partial downside protection to help meet your goals and align with your comfort for risk.

Risks and Considerations (Cons)

Fees and Expenses

Annuities can be associated with higher fees and expenses compared to other investment vehicles. Common charges include administrative fees, mortality and expense fees, and surrender charges; these vary depending on the product and benefits you choose. Traditional, commissioned annuities, with expensive sales commissions built into the pricing, tend to cost more than the new commission-free annuities available today. When shopping for an annuity, look for "commission-free" or “no-load” products. Work with a fiduciary financial advisor or an insurance specialist who can help you evaluate the product costs and how they may impact your overall returns.


Most annuities are designed as long-term investment vehicles, and some products require a duration or surrender period when funds cannot be withdrawn without incurring a surrender charge or other penalties. The good news is that many of today’s commission-free annuities do not have surrender periods, allowing greater access to funds if needed. Even so, if you anticipate needing immediate access to your invested money, an annuity may not be the most suitable option.

Complexity and Transparency

Traditional annuities have a deserved reputation as being complex products that lack transparency. The abundance of features and optional benefits (called "today's" riders") can make it challenging to grasp the intricacies of your annuity contract fully. Today's modern annuities have been simplified to offer greater value and transparency to consumers. When you're considering an annuity purchase, work with a fiduciary financial advisor who can ensure you understand the costs, features, benefits, and potential risks of the product you're purchasing, and consider "commission-free" or "no-load" annuities, which tend to be simpler, more straightforward products by design.

Inflation Risk

One potential drawback of fixed annuities is their susceptibility to inflation risk. As the cost of living rises over time, the purchasing power of a fixed income stream may diminish. Considering inflation when choosing an annuity and exploring options that provide potential inflation-adjusted income is crucial.

The Take Away

Annuities can be valuable tools for retirement planning. They offer secure lifetime income and tax advantages and help mitigate risks that can derail your retirement, like market declines and the risk of outliving your money. As with all financial products, you must understand the product you are purchasing, including its features and benefits and its fees, liquidity, and inflation protections. Before investing in an annuity, weigh these pros and cons against your financial goals, risk tolerance, and future needs.

Consulting with a qualified fee-only financial advisor such as Collins Wealth Management is recommended to ensure you make an informed decision that serves your specific circumstances. By doing so, you can make the most of annuities' benefits while mitigating the potential downsides.


This work is powered by DPL Financial Partners and may be a derivative of the original.

The information herein is intended for educational purposes only and is not exhaustive. Diversification or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your situation.

FINRA has not reviewed this content.

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