Whether you’re planning for retirement or seeking savings strategies, annuities can help you achieve long-term financial targets. Annuities offer payouts later in life — with zero tax implications before the first payout. And various annuity types exist, providing the flexibility to craft an investment strategy that suits your lifestyle and preferences.
As attractive as these advantages are, annuities aren’t for everyone. Read on to explore the pros and cons of annuities to determine if they support your goals.
Annuities aren’t either “good” or “bad” — your attitude toward them largely depends on personal factors like your investment time horizon, growth expectations, and risk preferences. There are also various types of annuities, each impacting your projected earnings in different ways. But as a general rule, annuities are most attractive if you prioritize predictability, security, and a passive approach to long-term investing.
Here are some of the pros and cons of annuities.
Annuities can greatly reduce a major retirement worry: Outliving your savings. Although not every annuity includes guaranteed income for life, it’s possible to add this feature with an optional rider.
For instance, some annuities, like Gainbridge®’s ParityFlex™, automatically let you claim lifelong distributions thanks to a built-in Guaranteed Lifetime Withdrawal Benefit (GLWB).
Each annuity type comes with a unique risk profile, contribution schedule, and rider options. These options allow you to customize your contract’s parameters to perfectly suit your long-term investment plan.
For example, fixed annuities offer a preset interest rate, providing predictability at the expense of leveraging potential market growth. An immediate annuity requires a lump sum investment at the start, while deferred annuities let you contribute payments throughout an accumulation phase until you reach your full contribution. You can also add optional benefits that suit your preferences, including riders for lifetime withdrawals, inflation protection, and estate planning.
With all the available annuity types and customization options, you can craft an annuity that fits your money goals — whatever they are.
Many annuity types offer principal deposit protection. And annuity types like fixed index annuities come with downside protection or minimum guaranteed returns, so your account can’t drop below your deposit at the end of your term. With a fixed index annuity, you don’t actually invest in the stock market, instead you are credited interest based on the performance of the index your fixed index annuity is tracking. Plus, if your annuity has preset growth rates or interest percentages, your portfolio will only grow in value over the years.
You could also add riders to your annuity contract to ensure you receive a set principal amount — regardless of the annuity’s performance. So, if you’re worried about market volatility diminishing your retirement income, an annuity might ease your mind.
A tax-deferred annuity means you only pay taxes when the accumulation phase ends (typically at retirement age) and you start receiving regular payouts. By avoiding taxes all those years, you enjoy high compounding gains through interest rewards or growth in your underlying investments.
Also, when you pay taxes on withdrawals after retirement, you only pay income tax on your earnings. If you qualify for a lower tax bracket during retirement, this further reduces your tax burden so you can keep most of your annuity’s value.
When you set up an annuity, expect to lock your funds for years before receiving payouts. Although you could request withdrawals anytime, you’ll often face penalties from the issuing insurance company and the IRS.
Typically, an insurance company includes surrender charges in their contracts, which are additional fees you’ll pay on early withdrawals. And the IRS charges a 10% early withdrawal tax if you pull from your annuity before retirement age (59½). There are ways to avoid this charge — like with Gainbridge’s FastBreak™, which lets you withdraw non-tax-deferred earnings before 59½.
While you don’t typically pay taxes until an annuity pays out, there are often annual and one-time charges associated with these contracts. Each annuity has a distinctive fee schedule, but many include expenses for management, mortality and expense risk, and administration. On top of these built-in costs, optional benefits like riders deduct more from your yearly earnings.
There is a way around these fees — digital annuity platforms like Gainbridge® cut out the middleman, eliminating hidden administration, maintenance, and commission costs.
Annuities aren’t the most straightforward asset category. With various annuity types to research — each with unique risk profiles, fee schedules, and payout structures — it takes time to grasp how each annuity works. And legal documents can read like gibberish. But many annuity providers (like Gainbridge®) offer easy-to-access support to guide you through the process.
Annuities are closely linked to retirement plans because they offer a safe and reliable way to grow your funds and ensure you have a predictable income stream later in life. With additional benefits like LIBR and GLWB, you could guarantee lifelong payouts and never worry about your savings running out. And extra benefits like tax deferral, principal protection, and fixed returns make annuities even more attractive if you’re looking for a secure place to store your savings.
But ultimately, whether an annuity suits your retirement plan depends on your financial goals and how each annuity type lines up with your income needs.
Despite their strong reputation with retirement accounts, annuities also have a place in a long-term savings strategy. If you value predictability and security, annuities provide a way to lock in gains over a decade and create a reliable cash flow for your future. Plus, you could still use annuities to capitalize on market volatility. For example, variable annuities let you buy and hold assets like mutual funds in subaccounts for potential tax-deferred gains.
There are also annuities like FastBreak™ that let you withdraw before 59½ without an IRS charge — a great option for non-retirees. So, even though annuities are known as retirement products, there are now annuity types suited to non-retirement goals.
All guarantees are subject to the financial strength and claims paying ability of the issuing insurance company.
ParityFlex™ is issued by Ganbridge Life Insurance Company (Zionsville, Indiana).
FastBreak™ is issued through Gainbridge Life Insurance Company (Zionsville, IN).
Withdrawals are taxed as ordinary income and, if taken prior to age 59½, there may be a 10% federal tax penalty. Early withdrawals from an annuity may result in a surrender charge or market value adjustment. Annuities are long-term investment vehicles and have termination provisions for keeping them in force.
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