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Pros and Cons of Annuities: An Analysis for Informed Decision-Making

September 18. 2023

When it comes to retirement planning, annuities can be a valuable tool. They can offer a steady stream of income, which can be crucial for individuals seeking financial security after they stop working.  Annuities offer other benefits as well, including the ability to grow your money tax-deferred and to protect assets from market volatility. 

There are many different types of annuities, each designed to deliver different benefits. And, today there is a new breed of annuities known as “commission-free” or “no-load.”  These products are lower cost and often offer improved benefits over their more expensive predecessors.  

Like all financial products, annuities have some potential drawbacks, so it is important to carefully consider the pros and cons before purchasing one.  

In this post, we’ll explore the advantages and disadvantages of annuities to help you make an informed decision based on your unique financial goals and circumstances. 

Annuity Basics 

An annuity is a contract between you and an insurance company designed to pay a steady stream of income for a fixed period or for life. When purchasing an annuity for income, you make a lump-sum payment or a series of payments to the insurance company. The insurer then invests your money and, when you are ready, pays you a regular stream of income that can start immediately or many years later, depending on your needs. 

Learn about the basics of annuities and how they work. 

Pros of Annuities 

Annuities have been around for a very long time. Their use can be traced as far back as the Roman Empire, and they have been used in the U.S. for more than two hundred years. The popularity of annuities continues to grow today due to the many benefits they offer:  

Guaranteed Lifetime Income

Annuities are designed to provide a secure income stream that is guaranteed to last as long as you live, ensuring you have a reliable source of funds to cover essential expenses throughout your retirement. As traditional pensions disappear and individuals seek ways to convert their lifetime savings into retirement income, annuities often are purchased to serve as a “personal pension”. Depending on the type of annuity you choose and other factors — where you live, how old you are, when you plan to retire, how much income you need — you can secure income that remains steady or rises annually, increases to help cover health-related expenses and more. 

Income Efficiency & Risk Pooling

Leading economists and retirement researchers have long agreed that annuities are the most efficient way to fund retirement income. According to retirement researcher Wade Pfau, “Risk pooling with an income annuity can support a higher level of lifetime spending compared to bonds.” For this reason, many purchase annuities as a bond alternative to generate efficient, predictable income they can count on for the length of their retirement, a benefit bonds cannot provide. 

Tax Advantages

Annuities offer tax-deferred growth, which means you aren’t taxed on the interest you earn while your money is in the annuity.  You don’t pay taxes until you begin taking income payments, which can help your retirement savings grow faster. This can be beneficial for individuals looking to accumulate wealth over time, as it allows the principal and earnings to compound without being diminished by annual taxes. 


Annuities come in various forms, allowing you to choose features and benefits that align with your specific needs. For example, fixed annuities are very simple products that provide a predetermined interest rate for a set period, enabling your money to safely and predictably grow with tax-deferral.  Variable annuities offer the potential for higher returns by investing in a range of investment options, enabling you to participate in market gains but also market losses. And there are other types of annuities that offer market participation with complete or partial downside protection, to help meet your goals and align with your comfort for risk.  

Risks and Considerations 

Fees and Expenses

Annuities can be associated with higher fees and expenses compared to other investment vehicles. Common charges include administrative fees, mortality and expense fees, and surrender charges; these vary depending on the product and benefits you choose. Traditional, commissioned annuities, which have expensive sales commissions built into the pricing, tend to cost more than the new breed of commission-free annuities available today. When shopping for an annuity, look for “commission-free” or “no-load” products. Work with a fiduciary financial advisor or an insurance specialist who can help you evaluate the product costs and how they may impact your overall returns. 


Most annuities are designed as long-term investment vehicles, and some products require a duration or surrender period when funds cannot be withdrawn without incurring a surrender charge or other penalties. The good news is that many of today’s commission-free annuities do not have surrender periods, allowing for greater access to funds if they are needed.  Even so, if you anticipate needing immediate access to your invested money, an annuity may not be the most suitable option. 

Complexity and Transparency

Traditional annuities have a deserved reputation as being complex products that lack transparency. The abundance of features and optional benefits (called “riders”) can make it challenging to fully grasp the intricacies of your annuity contract. Today’s modern annuities have been simplified to offer greater value and transparency to consumers. When you’re considering an annuity purchase, work with a fiduciary financial advisor who can ensure you understand the costs, features, benefits, and potential risks of the product you’re purchasing, and consider “commission-free” or “no-load” annuities, which tend to be simpler, more straight-forward products by design. 

Inflation Risk

One potential drawback of fixed annuities is their susceptibility to inflation risk. As the cost of living rises over time, the purchasing power of a fixed income stream may diminish. It is crucial to consider inflation when choosing an annuity and explore options that provide potential inflation-adjusted income. 

The Bottom Line with Annuities 

Annuities can be valuable tools for retirement planning. They offer secure lifetime income, tax advantages, and help mitigate risks that can derail your retirement, like market declines and the risk of outliving your money. As with all financial products, it is important that you understand the product you are purchasing, including its features and benefits, as well as its fees, liquidity, and inflation protections. Before investing in an annuity, weigh these pros and cons against your financial goals, risk tolerance, and future needs.  

Consulting with a qualified financial advisor is recommended to ensure you make an informed decision that serves your specific circumstances. By doing so, you can make the most of annuities' benefits while mitigating the potential downsides. 

Learn about the benefits of fiduciary financial advisors. 

To learn more about annuity types and compare products, use the free Product Discovery Tools at or contact a DPL consultant at 1-877-625-5544.  


Fixed index annuities are tax-deferred insurance products that provide market upside while protecting the principal from market losses.  Assets are allocated into indices that are designed to replicate market performance. These fixed index annuity indices are typically accompanied with cap rates, spreads, or participation rates. Variable annuities involve risk, including possible loss of principal. All guarantees are based on the claims-paying ability of the issuing insurance company. 


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