Annuity Pros and Cons

Like all financial products, annuities come with pros and cons which everyone getting into them should be aware of.

Starting with the pro side, the main advantages attached to annuities are the financial security and tax deferment features they offer, which we will briefly examine.

The financial security from annuities is based on the guarantees they come with. This is especially so with fixed rate annuities, which offer the annuity holder a guaranteed stream of income for the rest of his life (or up to the annuity expiry), regardless of how well or poorly the investment into which the annuity premium is put into performs. This insulates the annuity holder and his capital (the money he has put into the annuity) from the ups and downs of the investments markets. Take note however, that the strength of the guarantee behind an annuity depends on the strength of the company offering the annuity. But when all is said and done, annuities issued by viable insurance companies are among the securest investments one can make that still give a reasonable return and for a long period of time.

The tax deferment benefits come from the fact that annuities (specifically deferred annuities) are not taxed during their deferral stage, that is, the stage at which the annuity holder is still building up the annuity by making contributions to the annuity. In fact, because income from annuities is taxed as capital gain, as long as you keep your money within the annuity, it will not be subjected to any taxation.

On the downside, the main disadvantages behind annuities are their cost and inherent risk.

Regarding costs, annuities come with many explicit and implicit (hidden) costs. As it were, the companies offering annuities are in business, and they charge you for all the features and conveniences they offer. Thus one has to keep the total cost of the annuity in mind, and weigh it against the benefits from it before making the decision to commit to it.

Regarding risks, annuities, like all investments come with an element of risk which any prospective annuity holder needs to be aware of. For example if the insurance company offering the annuities goes down, so does the money the annuity holder will have put into the annuity. In the case of variable rate annuities, the risk exposure for the annuity holder is even greater. This is because the income from the annuity in the case of variable rate annuities depends on the performance of the investment into which the annuity premium has been put.