Wealth Insights

Understanding the pros and cons of annuities

The appeal of annuities continues to grow, even as most Americans don’t know much about them.

Annuities are an often-misunderstood financial vehicle. Around 79% of U.S. adults don’t know what they are.¹ Only 19% of those surveyed correctly identified an annuity as an insurance contract where you pay a premium to an insurance company in exchange for income payments.¹

Despite the confusion, as millions of Baby Boomers reach retirement age, annuities have become popular. For example, sales reached a record-high $434 billion in the U.S. in 2024.²

Strategic use of annuities: Diversifying income streams

What is it about modern times that are driving people to buy annuities? For the answer, we must look to the past. Decades ago, American retirees relied on the “three-legged stool” of retirement income: Social Security, savings and a pension. However, only around 15% of workers in the private sector have access to a pension today, the Bureau of Labor Statistics reports.³

“When you buy a certain type of annuity, you are creating a pension for yourself,” says Lyle Maurer, CWS®, a financial advisor for Regions Investment Services. This is particularly the case for immediate annuities and deferred annuities. “Clients are not typically using this as a primary income source, but rather a supplement to their retirement income.”

To better understand when an annuity might be something to consider, let’s dive into exactly why some investors find them appealing. We’ll also explore some of the disadvantages and learn when an annuity might not make sense.

Pros of annuities

While protection from market fluctuations is often a primary motivation for considering fixed annuities, there are other benefits to consider.

“An annuity is a tool to solve the client’s needs: if they’re more conservative with a portion of their assets, this tool can be considered as a part of their retirement plan,” says Maurer. “Beyond the fear of market volatility, some clients consider an annuity in their retirement planning because they provide a form of tax deferral and are an alternative to CDs. They can provide steady income in retirement.” An annuity might also make sense if you have a long life expectancy and you’re concerned about outliving your assets.

Let’s take a closer look at a few of those points.

• Tax-advantaged growth allows your money to compound more efficiently. In general, earnings inside the annuity grow tax-free until withdrawals are made. This tax deferral allows the principal and earnings to compound faster, potentially leading to a larger payout in retirement.
• There are several features that make an annuity a competitive alternative to traditional bank products in a changing interest rate environment. These include guaranteed interest rates, flexibility in payment options, and the potential for higher returns through variable or indexed annuities.
• Lifetime-income guarantees are designed to ensure you won’t outlive your assets as a sort of longevity insurance; however, it is important to keep in mind these guarantees rely on the claims paying ability of the insurer. An annuity is potentially a more predictable income stream that can supplement other retirement income sources.
• A simplified approach to retirement income withdrawals is another thing to consider. If managing withdrawals from an IRA or 401(k) to ensure you don’t spend too much feels daunting, the consistent payout of an annuity might be appealing.

Cons of annuities

Every financial vehicle has its pros and cons, and annuities are no exception. There are some fees and risks to know about before making a decision, and many of these will vary by the type of annuity you’re considering.

• In general, annuities have liquidity restrictions, including surrender schedules and early withdrawal penalties. They offer some level of liquidity through provisions like free withdrawals or return of premium features. These allow access to funds, but it's important to understand the potential tax implications of these withdrawals.
• Annuity fee structures may include mortality and expense (M&E) charges, administration fees, and rider costs. M&E charges cover the risk that the insurance company is shouldering, while administrative fees cover the cost of managing the contract. Rider costs are incurred when optional features are added to the annuity.
• Tax implications, particularly regarding withdrawals and distributions, are another thing to consider. This varies based on your income and tax bracket.
• Inflation concerns are also important to factor in. Fixed annuities don’t adjust for inflation unless you add an inflation rider.
• Complexity can be a barrier. Annuities are multifaceted products with various options, fees, and risks, making it difficult for many individuals to understand their terms and potential implications. And as mentioned before, there is an unknown amount of risk that the insurance company runs into problems that impact their ability to pay claims.

Types of annuities

Some of the confusion around annuities results from the various types available, each with their own acronym. Here are some basic facts about four of them.

Single Premium Immediate Annuity (SPIA): A type of annuity where you make a one-time, lump-sum payment to an insurance company, and in return, you receive a guaranteed stream of income payments, often for life. It's designed to provide a reliable income source, especially during retirement, by converting a lump sum into a predictable cash flow.

Multi-Year Guaranteed Annuity (MYGA): A type of fixed annuity that offers a guaranteed interest rate for a set period, typically 3 to 10 years. It’s often used for retirement savings, providing tax-deferred growth and a predictable stream of income. People often see it as an appropriate fit for retirees or those nearing retirement who are looking for a conservative investment with a guaranteed income stream.

Registered Index-linked Annuity (RILA ):* A type of annuity that offers a mix of growth potential and downside protection, making it a popular choice for retirement planning. RILAs are linked to the performance of a specific stock market index, allowing for potential growth while also offering a level of protection against market downturns.

Fixed Index Annuity (FIA) :* An annuity that offers a blend of market-based growth and principal protection. They offer potential growth tied to a market index (like the S&P 500) while guaranteeing a minimum interest rate. FIAs typically have a “cap rate” that limits upside potential but also protects from market downturns.

An individual’s needs and intended use for the investable assets should be taken into account before deciding on the type of annuity.

“An investor should have a conversation with a financial advisor to explore which vehicles would work best for them based on their investment goals and timeline,” Maurer says. An advisor can create a financial plan that takes into account what you envision for your financial future, and how particular investment vehicles like annuities might fit into that plan.

Talk to your advisor at Regions about:

1. How to create reliable streams of income in retirement.
2. What options are available to hedge against longevity risk.

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Sources:

¹ Policygenius. “Roughly 4 out of 5 American Adults Don’t Know What an Annuity Is,” July 2024.
² LIMRA. “LIMRA: 2024 Retail Annuity Sales Grow 13% to a Record $434.1 Billion.” March 2025.
³ U.S. Bureau of Labor Statistics. “15 Percent of Private Industry Workers Had Access to a Defined Benefit Retirement Plan,” April 2024.