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Sound Advice: July 16, 2025

Fixed annuities are poor investments

Fixed annuities are often criticized as poor investments for several reasons, despite their reputation for providing stable, predictable income.  Here are the key drawbacks and concerns: 

High Fees and Commissions

  • Internal Fees: Fixed annuities can carry a range of fees, including administrative charges, mortality expense risk fees, and rider fees. These can add up to 2%–4% per year, significantly eroding returns over time.
  • Commissions: Sales agents and financial advisors often receive high commissions for selling annuities—sometimes as much as 5%–8% of the invested amount. This creates a financial incentive for advisers to recommend them, even when they may not be the best fit for the client.
  • Comparison to Other Investments: Mutual funds and ETFs typically have much lower fees and commissions, making them more cost-effective for long-term growth.

Limited Growth and Inflation Risk

  • Fixed Returns: While fixed annuities provide a guaranteed return, this also means you miss out on higher potential gains from market-based investments during strong market periods.
  • No Inflation Protection: Fixed annuities generally do not offer built-in inflation protection. Over long periods, inflation can significantly reduce the purchasing power of your annuity payments unless you pay extra for a cost-of-living rider, which further increases costs.

Lack of Liquidity and Accessibility

  • Surrender Charges: Most fixed annuities have long surrender periods (often 5–10 years or more). If you need to access your money before this period ends, you may face surrender charges of up to 10%–25% of your principal.
  • Limited Withdrawals: Annuities typically restrict the amount you can withdraw each year without penalty, making it difficult to access your money in an emergency.

Tax and Penalty Considerations

  • Tax Penalties: Withdrawals before age 59½ may be subject to a 10% tax penalty in addition to regular income tax.
  • Tax Treatment of Gains: Growth in non-qualified annuities is taxed as ordinary income when withdrawn, which can be less favorable than capital gains treatment for other investments.

Other Concerns

  • Complexity: Annuity contracts can be difficult to understand, with complex terms and conditions that are not always clearly explained to investors.
  • Insurance Company Risk: While rare, there is a risk that the insurance company issuing the annuity could become insolvent, potentially putting your investment at risk.

Although fixed annuities can provide predictable income and security for risk-averse investors, their high costs, limited growth, and lack of liquidity make them a poor choice for many investors seeking long-term growth or flexibility.  The key exceptions would be the rare times when interest rates are extremely high, as they were in the early 1980s.  Short of that, the main incentives for the sale of fixed annuities are the commissions for the salespeople.   

N. Russell Wayne

Weston, CT  06883

203-895-8877

www.soundasset.blogspot.com

 

 

  

Why are fixed annuities poor investments

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