Disadvantages of Fixed Annuities

While there are many advantages to fixed annuities, there are also many disadvantages.  As with anything, it is a matter of weighing the good attributes with the bad ones.

Let's take a look at some of the disadvantages of fixed income annuities.

1.    Poor inflation and hyperinflation protection.  Fixed annuities contracts generally do not do well keeping up with inflation.  Each year, the purchasing power from the annuities income payments will decrease.  Some contracts will have a COLA rider or other inflation provisions built into the contract.  Be sure to factor inflation into any fixed annuity income calculation.

2.    Annuities can greatly vary from company to company.  Because each company puts out their own fixed annuity products, it can be difficult to "shop around" for a fixed annuity.  Not all annuities are created equal.  This can require the help of an experience professional to determine if a particular product is best for you.  By this same token, a professional that has exposure to multiple insurance companies, rather than a company specific agent, will have the ability to help you select the most competitive contracts.

3.    Fixed annuity contracts can be complicated.  As you can see from some of the articles on this website, the details of a fixed annuity contract can make a big difference as to how the investment actually functions.  Minor details make a big difference.  (Though this is classified as a con, most financial products these days have this problem.  We are living in an increasingly more complicated tax and legal environment).

4.    Lower returns on your investment.  Fixed annuities, similar to CDs, are meant to provide safety and not great return on investment.  If explosive growth is your goal, a riskier investment would be a more suitable alternative.

5.    Relatively Illiquid.  Fixed annuities are designed to be distributed over a determined number of payments.  As such, there are fees and penalties associated with early or unordinary withdrawals from the investment.  Many people are hesitant to tie up a large portion of their assets in such an inflexible investment.  Keep in mind that this is in the eye of the holder.  Whenever you use product differently than it is designed, you are going to have adverse consequences.

6.    Income is taxed as ordinary income.  While the tax-deferred attributes of fixed annuities is beneficial to growth, once payments begin, income is taxed as ordinary income and not considered capital gains.

7.    Surrender charges.  As discussed above, there are relatively expensive charges if you decide to cancel your account and pull your money out prematurely.

8.    Fees, Commissions, etc. One of the biggest complaints regarding annuities is that they often have quite steep upfront purchase charges.  The sale of the annuity is often associated with a commission on the end of the salesperson.  Fees to create the account also factor into the cost of the annuity.  While these are bulked into the purchase price of the annuity, many are wary of their impact on the product.

The disadvantages of fixed annuities should be carefully assessed and considered before any annuity purchase.