- Annuities can offer tax-deferred growth and guaranteed retirement income.
- Their biggest benefit is predictable, stable income.
- Their biggest downsides are limited access to cash, possible fees and lower growth potential.
- Annuities are generally best for long-term retirement planning, not short-term cash needs.
Pros and Cons of Annuities
Retirement plans are personal, and the mix of income sources that works for one household may not work for another. If you’re weighing the pros and cons of annuities, it helps to start with one basic question: Do you want part of your retirement strategy built around predictability?
Key Takeaways
Annuities are insurance contracts that can help grow money on a tax-deferred basis and, depending on the contract, provide guaranteed income in retirement. Some people focus on annuity benefits like stable growth and lifetime income. Others focus first on trade-offs like liquidity, fees or withdrawal restrictions. Understanding both sides can help you decide whether an annuity belongs alongside other retirement accounts like IRAs or 401(k)s.
Quick takeaway: Annuities may appeal to people who want more predictable retirement income, but they’re typically best suited for long-term planning rather than short-term access to cash.
What is an annuity?
An annuity is a contract between you and an insurance company in which the insurance company makes a series of regular payments to you in return for premium payments you’ve made. Some annuities may allow you to withdraw a portion or all of your accumulated earnings before payments begin. Annuities differ from life insurance in two important ways. There’s no medical underwriting involved in an Amica annuity contract, and your annuity can start making payments before your death.
With a deferred annuity, you contribute either a lump sum or a series of payments. The money then accumulates on a tax-deferred basis until you begin withdrawals or convert the contract to a stream of income. If you want a deeper look at this structure, explore what a deferred annuity is and what it can do for you.
An immediate annuity works differently. It typically turns a lump-sum contribution into income payments that can start within the first year or as soon as 30 days, depending on the contract. That may make it more relevant for someone who’s already retired or expects to need income soon.
Deferred vs. Immediate Annuities
| Annuity type | How it’s commonly funded | When income may begin | Who it may fit |
|---|---|---|---|
| Deferred annuity | Lump sum or multiple contributions | Later, after an accumulation period | People still building retirement assets |
| Immediate annuity | Usually a lump sum | Soon after purchase | People nearing or in retirement who want income now |
What are the main annuity benefits?
Guaranteed lifetime income
An annuity can help address one of the biggest retirement concerns – outliving your savings. Depending on the contract and payout option, an annuity may provide guaranteed income for life or for a set period regardless of market performance.
Tax-deferred growth
Deferred annuities allow your money to grow over time without current federal income tax on earnings until withdrawal. That tax treatment is one reason some people compare annuities with other retirement vehicles rather than using just one approach.
Flexible payment options
From deferred annuities to immediate annuities, there are options that support different goals. Some contracts emphasize future income, while others offer more flexibility around when withdrawals or payments begin.
Depending on your annuity contract, you may be able to choose monthly, quarterly, semiannual or annual payments.
Death benefits and legacy considerations
Some annuities can also support legacy planning. Depending on the contract and payout choice, beneficiaries may receive remaining value as a lump sum or in payments. You may also be able to designate a charitable organization as a beneficiary.
A high-level benefits view
| Annuity benefits | Why they may matter |
|---|---|
| Guaranteed lifetime income | Can help support retirement cash flow planning |
| Tax-deferred growth | Lets earnings grow until withdrawal |
| Flexible payment options | May help align income with retirement timing and needs |
| Death benefits and legacy considerations | Available on some annuities, may help support planning for beneficiaries |
What are the trade-offs of annuities?
Even when a contract offers strong guarantees, it may still be a poor fit if you need easy access to your money or more upside potential. Amica annuities don’t come with administrative fees or charges.
Fees and charges
Cost is one of the first things to review when comparing annuities’ advantages and disadvantages. Not every annuity is priced the same, and fees can vary by product type and contract features.
- Administration fees and mortality expenses: Carriers may charge fees for managing an annuity and taking on contract risk. Variable annuities may also include fees tied to investment subaccounts and optional riders. Unlike some other carriers,
- Surrender charges: You may be charged a penalty if you withdraw money from your annuity before the contract term allows. These charges are often highest earlier in the contract and may decline over time.1
Potential for lower returns
There is a balance between stability and upside with fixed annuities. A fixed annuity may offer more certainty, but that may mean less opportunity to benefit from strong market growth or rising rates during a locked-in term.
Tax implications upon withdrawal
Your annuity may grow tax-deferred before withdrawals begin, but distributions are generally taxed as ordinary income. If you take money out before age 59½, you may also be subject to a 10% IRS penalty unless an exception applies.
Trade-offs at a glance
| Pros and cons of annuities | Potential advantages | Potential disadvantages |
|---|---|---|
| Income planning | Guaranteed income options may reduce the risk of outliving savings | Income terms vary by contract and may reduce flexibility later |
| Growth | Tax-deferred accumulation and fixed-rate stability | Lower upside potential than some market-based investments |
| Access to money | Some contracts allow limited withdrawals | Surrender charges and limited liquidity can apply |
| Risk profile | Fixed annuities avoid direct market volatility | Guarantees depend on the insurer’s claims-paying ability |
Consider the financial strength of the insurer
The financial stability of the insurer matters because annuity guarantees are tied to the company that issues the contract. At Amica, we’ve earned a financial strength rating of A+ (Superior) from AM Best, a leading insurance rating agency and the nation’s authority on insurance company financial stability.2
How to think about fixed annuities pros and cons
Annuities are often easier to evaluate when you compare them to your goals instead of judging them in the abstract. If you’re focused on principal protection, stable growth and the option for guaranteed income, a fixed annuity may be worth a closer look. If you expect to need faster access to cash or want more growth potential, other options may deserve more attention.
Amica offers fixed annuities designed for long-term retirement planning. You can explore annuities in general, review multi-year guaranteed annuity (MYGA) details or learn more about tax-deferred growth.
How are annuity payments calculated?
Insurance companies rely on payout rates to calculate payments for many annuities. Payout rates help determine what percentage of your premium you may receive each year. Rates are generally based on factors like age and sex, along with the annuity option selected. Each contract includes its own guaranteed minimum payout rates, and companies may offer higher rates depending on current immediate annuity rates.
Because contract terms vary, this is one of the most important areas to review before buying. The same annuity benefits that make a contract attractive for one retiree may make less sense for another.
Questions to ask before buying an annuity
As you evaluate your retirement income strategy, it helps to ask a few practical questions before you buy:
- When do you want income to begin?
- How much liquidity do you want to keep outside the contract?
- Are you prioritizing predictability, growth potential or a mix of both?
- Are you funding your annuity with qualified or non-qualified funds?
- Do the contract terms and surrender schedule fit your timeline?
You may find that annuity benefits align well with your current plan, especially if part of your goal is dependable income. For broader context, you can also explore our guide to retirement planning and our full retirement resource center.
Learn more about Amica’s annuity products
or call 800-234-5433 to speak with an Amica annuity representative.
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FAQs about annuities
It usually comes down to predictability versus flexibility. Potential advantages include guaranteed income, tax-deferred growth and protection from direct market volatility. Potential disadvantages include surrender charges, lower liquidity and possible limits on growth depending on the contract type.
These include guaranteed income options, stable growth with fixed contracts and the ability to turn retirement assets into a predictable payment stream.
They may be a fit for people who want more stability and less market risk in part of their retirement strategy. But the right fit depends on your timeline, need for liquidity and overall retirement income plan.
IRAs and 401(k)s are retirement accounts, while annuities are insurance contracts. Annuities may offer guaranteed income and fixed growth options, while other retirement accounts may offer different contribution rules, investment choices and liquidity features.
You can learn more on Amica’s annuity products page or review MYGA details if you want to explore a fixed deferred annuity option.
Annuity Fees and Commissions, Annuity.org
A+ (Superior) is the second highest of 13 company ratings. Ratings range from A++ (Superior) to D (Poor). AM Best's ratings measure an insurer's financial strength.
Policies issued by Amica Life Insurance Company. NAIC No. 72222.
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ALIC00324 Feb-29