Key Takeaways
- Annuities are retirement savings insurance products that offer guaranteed income, appealing to risk-averse retirees.
- Some annuities guarantee income for life, even if balances hit zero. Others offer add-ons for death benefits and long-term care costs.
- Annuities provide tax-deferred growth, allowing earnings to accumulate without immediate tax liabilities.
- Trade-offs include limited access, a cap on gains and potentially lower returns.
Annuities are among the most controversial financial planning tools. These insurance products have a reputation for being sold to clients who may not need them, but there are several legitimate use cases for guaranteed income.
Aware of some problems with annuity sales, the National Association of Insurance Commissioners, also called NAIC, revised its Suitability in Annuity Transactions Model Regulation in 2020 to require insurance agents and carriers to act in a client’s best interest rather than merely recommend a “suitable” product.
As of 2026, the rule has been widely adopted across the United States, and the NAIC continues to refine guidance to clarify how the best interest standard should be applied in practice.
Despite improvements to the regulatory framework, consumers and even many financial advisors struggle to balance the following pros and cons of annuities.
Pros of Annuities
An annuity is a contract with an insurance company designed to address specific goals, such as principal protection, lifetime income, legacy planning or long-term care costs. Annuities can be useful retirement planning tools that offer guaranteed income, tax-deferred growth and customizable options.
Guaranteed Income
This characteristic of annuities is familiar to many retirees. “A very large segment of the annuity business is annuities that are written with a guaranteed lifetime withdrawal benefit rider attached,” said Charlie Gipple, a certified financial planner and owner of CG Financial Group in Johnston, Iowa, in an email.
These riders, or optional benefits added to the annuity, provide guaranteed lifetime income, with the amount depending on when the contract owner begins making withdrawals. “Like with Social Security, the longer you defer, generally, the higher the income. And that income is guaranteed for life, even if your actual account value hits zero,” Gipple said.
He cites an example from an annuity he owns. At age 46, he put $200,000 into an annuity with a guaranteed lifetime withdrawal benefit rider. “When I hit age 65, 19 years from then, that annuity will guarantee my spouse and me almost $44,000 per year for our lives, even after our original $200,000 is spent down to zero,” he said.
Tax-Deferred Growth
A common misconception is that retirees need to liquidate investment accounts to purchase an annuity, but that is not the case, said Tracy Lownsberry, founder and trainer at the Annuity Giants in Petoskey, Michigan, in an email.
Instead, he said, annuities can be funded with pretax or after-tax dollars, and grow tax-deferred, or tax-free, when held in a Roth individual retirement account. “We prefer using qualified or pretax money within an annuity chassis (a tax-advantaged annuity structure), as it maintains its powerful tax-deferred status and follows the same rules as an IRA,” he said.
“What we do caution against is funding annuities with after-tax, non-qualified dollars,” he said. “While this still offers the benefit of tax deferral during accumulation, withdrawals on the interest will always be taxed as ordinary income, unless annuitized and eligible for the exclusion ratio.”
With single premium immediate annuities or deferred income annuities, annuitized payments are treated as a combination of income and return of principal, meaning a portion of each payment is not subject to tax.
Customizable Options
Modern annuities are far more flexible than their reputation suggests, Lownsberry said.
For example, fixed indexed annuities, registered index-linked annuities and variable annuities can have extra benefits attached in the form of riders. Despite many riders having an additional fee, retirees often find them useful additions to their planning tools.
“These can add coverage for long-term care costs, guaranteed increasing death benefits, guaranteed income for you and a surviving spouse, or inflation-adjusted payouts,” Lownsberry said.
“There are also annuities with equity-designed indexes that allow for more accumulation potential than a traditional fixed rate,” he added, noting that consumers must be mindful of which index is used as well as rates offered upfront and how those rates may change over time.
“And here’s a bonus: Many annuities today carry no fees at all, which is actually the majority of products currently offered,” he said.
Cons of Annuities
As with any financial product, annuities’ benefits come with some trade-offs. Many would-be annuity purchasers have concerns about high fees, limited liquidity and lower returns than they may get in a simple index fund.
High Fees
Annuities have a reputation for high fees because some of the more complicated products stack on commissions and extra features that come with charges. The fee amount depends on the type of annuity. For example, variable annuities, which invest in securities and offer returns based on market performance, generally have higher fees than other types of annuities.
But many modern annuities have low or no fees, such as multiyear guaranteed or index-linked products, where the declared interest rate is what you get.
However, some index-linked annuities may have a 9% or 10% cap on interest, which can limit your return. “If the S&P 500, for instance, goes up 5%, you get 5%. If it goes up 10%, then you get 9% if 9% is the cap on your product,” Gipple points out.
Limited Liquidity
Once your money is locked up in an annuity, in most cases, you can’t easily access it without paying a surrender charge. “Annuities are not designed to be fully liquid assets until the surrender period has ended,” Lownsberry said.
Most annuities, however, allow for a 10% annual withdrawal with no charge. While that may sound restrictive, it isn’t typically an issue if you’ve properly diversified and addressed liquidity elsewhere, Lownsberry said.
“Ten percent is well above any standard safe withdrawal rate,” he said. “What’s encouraging about many modern options is that they now come with shorter surrender periods, or in some cases, no surrender penalties at all.”
He urged annuity buyers to keep in mind that limited liquidity is the cost of benefits such as guaranteed income. “You simply need to weigh the trade-offs and design your retirement strategy accordingly,” Lownsberry said.
Potential for Lower Returns
Another trade-off for features like guaranteed income is a lower return than an investor might get in a fully invested equity portfolio, especially in a roaring bull market.
But that comparison misses the point, Lownsberry said. “Annuities aren’t competing with the equity markets on raw returns, yet that comparison gets made all too often,” he said. “In many cases, annuities designed for income aren’t competing on return at all – they’re competing on income payouts.”
Lownsberry added that it’s more appropriate to compare accumulation-focused annuities to other lower-risk assets, such as bond funds.
“Retirement isn’t about raw return anymore; it’s about risk-adjusted return,” he said. “Annuities allow you to reduce risk while still keeping your portfolio within a range designed to meet your goals.”
He noted that many recent annuities have shown competitive returns through their equity index options, making them a strong complement to a well-balanced stock-and-bond portfolio.
