The High Points and Low Points of Annuities

With the amount of confusion and lack of predictability in the economy today, it’s not surprising that more people have begun buying annuities — usually before they really understand the hidden implications (i.e., hidden fees and rules) that accompany both variable and fixed annuities.

The Advantages: The biggest advantage, and the one that draws most people to invest in annuities, is that you’re able to “buy” an annuity and store away a large sum of cash — and you’re able to defer tax payments on it, unlike other investment strategies (like real estate, stocks, etc.) Unlike other common retirement funds (like a 401k or IRA), there isn’t a minimum amount that you have to contribute each year into your fund, which means that you’ll have the flexibility to invest when you can and to hold back when expenses are tight.

The Disadvantages: The main reason why financial advisers usually encourage people not to invest in annuities is because there are tons of hidden fees: First, an annuity is technically a sale, involving structured settlement brokers who function as a salespeople, and those people usually charge steep commission fees. Second, if you take your money out of your annuity fund too soon, you could end up paying surrender fees as high as 20% of your total fund. And third, like most retirement funds, if you find yourself needing to withdraw any money from your fund before turning 59.5 years of age, you’ll encounter steep withdrawal fees there as well.

For anyone who regrets buying annuities, it’s possible to “surrender” the annuity by pulling all the money out of the fund, swap the annuity for another one, or try to sell settlement annuity payments to another person or business.

Keep in mind, though, that most of these options still come with plenty of fees, so it’s important to make sure that you’ve researched all of your options and discussed them with an adviser who functions as an uninvolved third party and won’t benefit more by convincing you to choose one option over the others. Annuities aren’t for everyone, and it’s okay to decide that you’d rather have a different retirement plan in place. Learn more about this topic here.