Few financial products attract as many strong opinions as annuities. Some people see them as a cure-all, and others have heard they’re something to avoid entirely. The truth usually sits somewhere in the middle, and a lot of the confusion comes from a handful of persistent myths.
Here’s a fair look at seven common annuity myths, and what’s closer to the truth. Along the way, we’ll connect each one back to the three goals we introduced in Protection, Accumulation, and Income: The 3 Goals Behind Every Annuity Decision.
seven common annuity myths
Myth 1: “All annuities are the same”
Closer to the truth: There are several very different types. Fixed annuities credit a set rate. Fixed indexed annuities credit interest linked to an index, with protection from index losses. Income annuities convert a lump sum into guaranteed payments. Variable annuities involve investment risk and are sold by securities-licensed professionals. This article focuses on fixed, fixed indexed, and income annuities, which are insurance products. Our guide, Comparing Annuities, walks through the differences.
Myth 2: “The insurance company keeps your money when you die”
Closer to the truth: It depends on the product and the payout option. During the accumulation phase, the remaining value generally passes to your named beneficiaries. With income annuities, options like joint life, period certain, or refund features can continue payments or return value to heirs. Life-only payout options do end at death, which is part of why they pay more, so it’s worth understanding your choice.
Myth 3: “Your money is completely locked up”
Closer to the truth: Most annuities have a surrender period, commonly several years, during which withdrawing more than an allowed amount triggers a charge. But many contracts also allow a limited amount to be withdrawn each year without a surrender charge. Annuities aren’t as liquid as a bank account, but they’re not a locked box either. This is why they’re generally best for money you don’t expect to need soon.
Myth 4: “Annuities are all loaded with fees”
Closer to the truth: Fees vary widely. Many fixed annuities have no explicit annual fee, while optional features like income riders usually carry an annual cost. The key is knowing exactly what you’re paying for. Our buyer’s checklist covers the questions to ask about costs.
Myth 5: “You have to turn it into income right away”
Closer to the truth: Many annuities let you choose whether and when to take income. Some people use an annuity purely as a protected place for savings to grow, a topic we cover in How Annuities Grow Tax-Deferred, and activate income later or never.
Myth 6: “Annuities are either perfectly safe or a gamble”
Closer to the truth: An annuity’s guarantees are backed by the claims-paying ability of the issuing insurance company, so the strength of the insurer matters. State guaranty associations provide protection up to limits that vary by state. Checking a carrier’s financial strength ratings is a sensible step before you commit.
Myth 7: “Annuity growth is tax-free”
Closer to the truth: Annuity growth is tax-deferred, not tax-free. You generally don’t pay tax on earnings until you withdraw them, and then they’re taxed as ordinary income. Withdrawals before age 59½ may also trigger an additional federal tax. If an annuity is held inside an IRA, the IRA already provides the tax deferral.
The Myths at a Glance
| Myth | What’s Closer to the Truth |
|---|---|
| All annuities are the same | Fixed, fixed indexed, and income annuities work very differently |
| The insurer keeps your money at death | Depends on the contract and payout option |
| Your money is locked up | Surrender periods apply, but limited free withdrawals are common |
| Annuities are loaded with fees | Varies; riders usually add an annual cost |
| You must take income right away | Often you choose whether and when |
| Perfectly safe or a gamble | Guarantees depend on the insurer’s claims-paying ability |
| Growth is tax-free | Tax-deferred, taxed as ordinary income when withdrawn |
So Are Annuities Right for You?
An annuity is a tool, and like any tool, it’s right for some jobs and wrong for others. The useful question isn’t “are annuities good or bad?” but “which of my goals needs support, and is an annuity the best way to meet it?”
- Protection: Do I need part of my savings shielded from market losses?
- Accumulation: Do I have money that can grow, tax-deferred, for years without being touched?
- Income: Do I need a guaranteed paycheck to cover essential expenses?
If the answer to one or more is yes, an annuity may be worth a closer look. If not, it may not belong in your plan, and that’s a perfectly valid conclusion too.
Get an Honest Answer
At PAG Advisory Group, we’d rather you understand a product fully than buy it quickly. Visit our page on the annuity specialist services we offer in South Carolina, or schedule a free review.
This article is for general educational purposes and is not tax, legal, or investment advice. Guarantees are backed by the claims-paying ability of the issuing insurance company. PAG Advisory Group specializes in insurance-based retirement strategies and does not offer securities, including variable annuities.
Have questions about what you’ve heard about annuities? Schedule a free retirement review and get straight, no-pressure answers.
