Annuities can provide stability and guaranteed income, but they aren’t right for everyone. Understanding the potential disadvantages upfront can help you avoid surprises and decide whether an annuity fits your retirement plan.
Annuities are long-term insurance contracts designed to provide income or protect savings. For some people, that tradeoff is worth it. For others, the downsides matter more. This page walks through the most common annuity disadvantages in plain language, with real-life examples to help you see how they show up in practice.
Potentially High Fees
Some annuities can be expensive, especially if they include optional features or market exposure.
Fees vary widely depending on the type of annuity. Fixed annuities often have minimal or no explicit fees. Variable annuities and some indexed annuities can include layers of costs that reduce long-term growth.
- Mortality and expense charges
- Ongoing costs for insurance guarantees
- Administrative fees
- Account maintenance and recordkeeping
- Investment management fees
- Applies to variable annuities invested in subaccounts
- Rider costs
- Optional features like lifetime income or inflation protection
Common Fee Types
Real-life example: David, 68, needed money for unexpected home repairs. His annuity allowed only partial withdrawals, and taking more meant paying a surrender charge. He had income security, but less flexibility than he expected.
Why this matters: Fees aren’t always bad, but they must deliver real value. Paying for features you don’t need can quietly erode returns over time. Working with a licensed annuity agent can help you understand your options and product features before committing.
Limited Liquidity
Many annuities limit how much money you can access early without penalties.
Annuities are designed for long-term income, not short-term cash needs. Withdrawing more than the allowed amount during the surrender period can trigger surrender charges and, in some cases, tax penalties.
Most contracts:
- Allow limited annual withdrawals (often around 10%).
- Impose surrender charges for early or excess withdrawals.
- Further reduce access to income-focused annuities, such as immediate annuities.
Real-life example: David, 68, needed money for unexpected home repairs. His annuity allowed only partial withdrawals, and taking more meant paying a surrender charge. He had income security, but less flexibility than he expected.
Why this matters: If you may need large sums of cash unexpectedly, tying up too much money in an annuity can create stress.
I recently had a client with money in a CD who wanted to buy a MYGA because rates are higher, and he wouldn’t have to pay taxes on it as it grows. However, he told me he needs to use the money while in the annuity phase, and I advised him that annuities are not liquid and that, in his case, there are penalties for withdrawing more than 10%. I deterred him and advised him to keep his money in a bank if he needs it liquid.
Aamir M. Chalisa, MBA, LUTCF, MDRTGeneral Manager at Futurity First Insurance GroupAamir M. Chalisa is a seasoned financial services leader with over 30 years of experience in insurance, wealth management and retirement planning. As General Manager of Futurity First Insurance Group’s Oak Brook branch, he oversees one of the company’s top-performing teams. Aamir has held leadership roles at MetLife, Prudential and Nationwide and is a Million Dollar Round Table (MDRT) qualifier, recognized for his expertise in life and annuity sales and commitment to helping clients achieve lasting financial security.
Losing Purchasing Power to Inflation
Fixed payments may not keep up with rising costs.
Many annuities pay a fixed amount that does not increase over time. Inflation can gradually reduce the amount of income that can buy, especially during long retirements.
Some annuities offer inflation protection or cost-of-living adjustments, but these features:
- Usually reduces initial income.
- Increase overall costs.
Real-life example: Janet retired at 65 with a steady annuity income. By age 80, groceries, utilities, and healthcare costs had risen significantly — but her payment stayed the same.
Why this matters: Guaranteed income is valuable, but it must be evaluated in real dollars over time, not just today’s purchasing power.
Product Complexity
Annuities can be hard to understand without guidance.
Different annuity types — fixed, indexed, variable, immediate and deferred — work in very different ways. Caps, participation rates, riders and payout options can overwhelm buyers.
Many people say they:
- Confuse income rates with interest rates.
- Don’t fully understand rider costs or benefits.
- Feel unsure how returns are calculated.
Real-life example: Tom compared two annuities with similar illustrations but very different outcomes. Without understanding caps and participation rates, he initially chose the wrong one for his goals.
Why this matters: Complexity increases the risk of buying a product that doesn’t align with your retirement plan. Speaking with a knowledgeable annuity professional can help clarify how features, fees and income options actually work and whether they fit your goals.
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Drawn-Out Buying Process
Purchasing an annuity isn’t instant.
Buying an annuity involves paperwork, underwriting, review periods and sometimes waiting for funds to transfer. This process exists to protect consumers — but it can feel slow.
For people expecting quick access or immediate decisions, the timeline can be frustrating.
Why this matters: Retirement decisions often come with time pressure. Understanding the buying timeline upfront can help you plan around cash needs, avoid rushed decisions and reduce stress while the process plays out.
Access to Information Can Be Uneven
Not all annuity information is easy to compare.
Because annuities are insurance products, details vary by carrier and state. Some information may only be available through licensed professionals.
This can make it harder to:
- Compare apples to apples.
- Understand true long-term costs.
- Feel confident without asking questions.
Why this matters: When information is fragmented or hard to compare, it’s easier to overlook important differences between contracts. Getting clear explanations and knowing what questions to ask can help you make a more informed choice and avoid surprises later.
Are Annuities a Bad Idea?
Not necessarily. Many of these disadvantages are trade-offs, not deal-breakers. The key is matching the right product to the right person.
An annuity may make sense if you value:
- Predictable income
- Protection from market losses
- Simplicity in retirement cash flow
They may be less suitable if you need:
- High liquidity
- Maximum growth potential
- Full flexibility with your money
How To Decide If an Annuity Is Right for You
Choosing an annuity isn’t about avoiding drawbacks — it’s about understanding the tradeoffs and using the product intentionally. The right annuity can add stability to a retirement plan, but the wrong one can feel restrictive.
Before committing, take time to consider what you actually need:
- What problem are you trying to solve — guaranteed income, growth protection or both?
- How much access to your money might you need in the future?
- Are you paying for features or riders you may never use?
- How does an annuity fit alongside Social Security, pensions and other income sources?
If you’re unsure, clarity is the next step. Comparing annuity types side by side and estimating potential income can help you see how different options may work in real life. Many people also choose to speak with a licensed annuity specialist who can explain features, tradeoffs and timelines without pressure.
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