- Back to Neil's Nook
- April 27, 2022
- 1:03 pm
In part 1 of my 3-part series on annuities, I presented a high-level primer on the types of annuity options in the marketplace based on the purpose they serve (accumulation vs. income). In this next installment, we will go deeper on accumulation annuities which are focused on growing your asset value until you need the money possibly many years into the future:
Pros
- Tax Deferral – one of the benefits of annuities is that taxes are not due on any growth in the account until the money is withdrawn from the annuity. This may be an attractive feature for non-qualified annuities which are paid for from non-retirement savings. In an investment account, these non-qualified savings would otherwise be subject to tax on dividends and realized capital gains each year, even if those dividends and capital gains were reinvested. However, note that qualified annuities are paid for from retirement accounts (e.g. IRA’s) which already have the benefit of tax deferral.
- Market Protection – many accumulation annuities give the investor asset growth, while also providing some level of protection from the volatility of the stock market. Fixed annuities are typically fully guaranteed and indexed annuities typically have protection from any losses. Some variable annuities include riders which provide some level of protection for the investor, but it is important to understand that plain vanilla variable annuities with no riders will have the full risk of loss from the underlying investments, just like a typical investment account.
Cons
- Fees – many policyowners are surprised by the level of fees included in their accumulation annuity. The fees can include separate charges for mortality risk, investment expenses, and rider costs which can total to an annual fee of 3% or more. However, there are accumulation annuities in the marketplace that have much lower fees, or no fees at all, so it is important to understand what you are purchasing in advance.
- Complexity – another common complaint about annuities is the level of complexity which makes them difficult to fully understand. This is true about some annuities, especially variable annuities with multiple riders, but there are also very simple versions of annuities in the marketplace that may suit your purpose without the added complexity.
- Liquidity – most annuities have some type of surrender period ranging from 5-10 years, during which a surrender charge is imposed if the funds are withdrawn. So, it is important to be aware that these annuities are long-term investments. In addition to the potential surrender charge, there can also be an early withdrawal penalty of 10% from the IRS if the investor withdraws funds before the age of 59 ½, similar to an IRA and other retirement savings vehicles.
In my next blog, we will go deeper on the pros and cons of income annuities.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
Fixed Indexed Annuities (FIA) are not suitable for all investors. FIAs permit investors to participate in only a stated percentage of an increase in an index (participation rate) and may impose a maximum annual account value percentage increase. FIAs typically do not allow for participation in dividends accumulated on the securities represented by the index. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Withdrawals prior to 59 ½ may result in an IRS penalty, and surrender charges may apply. Guarantees are based on the claims-paying ability of the issuing insurance company.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policy holder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.
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About the Author

Neil Manning, CFP, AIF, CDFA, FSA
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014. Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong). For more details about my background, check out my website below.