An annuity can provide a reliable source of income in retirement but it’s important to understand the pros and cons of the different types of annuities before you buy one.
Immediate Annuity
An Immediate Annuity involves making a lump-sum payment upfront for the right to receive payments from the insurer on a regular basis beginning immediately (usually within 30 days). It can be structured to pay for the rest of your life or a fixed timeframe.
Pros:
- Guaranteed income
- Generally provides a higher payout than other annuities
- No fees
Cons:
- Payouts on most immediate annuities are interest-rate sensitive
- No growth opportunities
- No inflation protection
Fixed Annuities
With a Fixed Annuity interest rates are historically higher than bank CDs and other popular income investments. Typically, payments don’t begin immediately but you can choose when to start receiving them.
Pros:
- Tax-deferred growth
- Interest rates are typically higher than CDs
- Protects against probate court
- No fees
Cons:
- No market growth opportunity
- Early withdrawal penalties
- Tax consequences on early withdrawal
- Limited increase in income to compensate for inflation
“As a result, your principal is protected against market volatility while providing an opportunity for growth.”
Fixed Indexed Annuities
With a Fixed Indexed Annuity (FIA), your account principal is linked to an index like the S&P 500. As a result, your principal is protected against market volatility while providing growth.
Pros:
- Low fees (typically 0% – 1.5%)
- Cannot lose principal or growth due to market volatility
- Tax-deferred growth
- Protects against probate court
Cons:
- Limited annual liquidity
- Early withdrawal penalties
- Tax consequences on early withdrawal
- Adjustable participation rates and caps
Variable Annuities
With a Variable Annuity, your money is invested by the insurer in professionally managed mutual funds that can invest in stocks, bonds, money market instruments, or a combination of all three. Although it offers potential for higher returns there’s the risk of loss due to investment in the market.
Pros:
- Choice and flexibility
- Higher potential for tax-deferred growth
- Optional, guaranteed lifetime income
- Full accumulation at death with optional rider
- Protects against probate court
Cons:
- Risk of loss due to funds invested in the market
- In the event of a volatile stock market, principal and growth may not be available in a lump sum withdrawal at the term’s end
- Typically higher fees (1% – 4%)
- Early withdrawal penalties
To discover the best type of annuity for your financial needs, connect with an FRC® trained advisor.
