The main pros of annuities are guaranteed income for life, tax-deferred growth, and protection from outliving your savings. The main cons are fees and surrender charges that tie up your money. Fixed payments also lose buying power to inflation unless you pay for a rider. An annuity tends to fit when Social Security and any pension won’t cover your essential bills.
Annuity sales hit a record $464.1 billion in 2025, so odds are someone has pitched you one. A record year says nothing about your own plan. Weigh what you’d gain against what you’d give up.
Annuity pros and cons at a glance
| Pros | Cons |
|---|---|
| Guaranteed income you can’t outlive | Variable annuity fees often run 2% to 3% a year |
| Tax-deferred growth until you withdraw | Surrender charges on early withdrawals |
| Principal protection on fixed and indexed annuities | A 10% additional tax on withdrawals before 59½ |
| A death benefit for your heirs | Gains taxed as ordinary income |
| Income that can continue for a surviving spouse | Fixed payments lose buying power without a rider |
| A 10- to 30-day free look period to cancel | Guarantees depend on the insurer’s strength |
Source: SEC Investor.gov, FINRA, IRS, and NOLHGA (November 2026).
What Are the Pros of Annuities?
The biggest pro of an annuity is a paycheck you can’t outlive. The insurer takes on the risk that you live to 95 or 100, and you stop worrying about whether your savings will last. Annuities also defer taxes on growth and can pass money to your heirs.
1. Income you can’t outlive
With an immediate lifetime annuity, you hand an insurer a lump sum and get a check every month for the rest of your life. Social Security and pensions work the same way, but their amounts are set by your work history. With an annuity, the income depends on how much you put in, and payouts rise with the age you buy.
2. Tax-deferred growth
You pay no taxes on interest or investment gains in an annuity until you withdraw them or start receiving income. That lets a deferred annuity compound longer than a taxable account would.
3. Protection from market losses
Fixed annuities pay a set interest rate, and fixed indexed annuities limit your losses in exchange for capping your gains. Either one can guarantee that you or your heirs get back at least what you put in. A variable annuity offers no such floor unless you pay for a rider.
4. Money for a spouse or heirs
A joint-and-survivor annuity keeps paying until both you and your spouse die. Many contracts also pay a death benefit to the beneficiary you name if you die before income starts.
5. Covering essential bills
Many retirees use an annuity to cover essential bills and invest the rest. Planners call this an income floor. Housing, food, and insurance get paid no matter what markets do, and your investments cover the extras.
What Are the Cons of Annuities?
The biggest con of an annuity is cost. Fees, commissions, and surrender charges reduce what you get back, and they can be hard to see in a sales pitch. Annuities also tie up your money and pay lower returns than a stock-heavy portfolio over long periods.
1. Fees and commissions
Variable annuities charge several layers of fees: a mortality and expense charge (such as 1.25% a year), administrative fees, fund expenses, and rider fees. Together they can add 2% to 3% a year. Most annuities are sold by agents who earn a commission, so ask what the seller is paid.
2. Surrender charges and limited access
Most deferred annuities charge a surrender fee if you pull out more than a set amount during the first several years. Once you annuitize, you can’t get the lump sum back in most contracts. Keep enough outside the annuity to cover emergencies and big expenses.
3. Taxes
The taxable part of each annuity payment counts as ordinary income, even if the gains came from stocks. Withdrawals before 59½ can owe a 10% additional tax. If you bought the annuity with after-tax money, an exclusion ratio sets how much of each payment comes back to you tax-free.
4. Inflation
A fixed payment buys less every year that prices rise. You can add a cost-of-living rider, but it costs more up front or lowers your starting payments.
5. Insurer risk
An annuity’s guarantees are only as strong as the insurer behind them. Check its rating from A.M. Best or S&P Global before you buy. If an insurer fails, your state’s guaranty association covers $250,000 in present value of annuity benefits in most states.
What Are the Pros and Cons of Each Type of Annuity?
Each type of annuity trades a different mix of guarantees, growth, and cost. The table below compares the main pro and con of each.
| Type | Main pro | Main con |
|---|---|---|
| Immediate income annuity | Income starts right away and lasts for life | You give up access to the lump sum |
| Fixed (deferred) annuity | A guaranteed interest rate | Growth may not keep up with inflation |
| Fixed indexed annuity | Some market upside with no loss of principal | Caps limit your gains |
| Registered index-linked annuity (RILA) | More upside than a fixed indexed annuity | You can lose money beyond a set buffer |
| Variable annuity | Full market growth potential | Highest fees, and you can lose money |
Source: SEC Investor.gov (November 2026).
Is an Annuity a Good Investment?
An annuity works better as insurance than as an investment. You pay for protection against living a long time, and the price is lower growth and higher fees than a portfolio of index funds. For most people, the question is whether part of their spending needs that protection.
Suze Orman’s objection is to how annuities are often sold: at high cost, inside the wrong account, to buyers who don’t understand them. She has been supportive of immediate and deferred income annuities. The type of annuity matters as much as the decision to buy one.
Who Is an Annuity Right For?
An annuity fits when guaranteed income would close a gap between your essential bills and your Social Security or pension.
An annuity may fit if you:
- Expect to live into your 90s, based on your health and family history
- Have savings left over after an emergency fund
- Would rather not manage withdrawals from a portfolio yourself
An annuity may not fit if you:
- Might need the money for a house, medical bills, or family in the next several years
- Could raise your guaranteed income for less by delaying Social Security
- Have a short life expectancy
- Already have a pension that covers your core expenses
What Do You Ask Before Buying an Annuity?
Before you sign, ask the seller to answer these questions in writing. They cover the annuity mistakes buyers regret.
- What are all the fees? Ask for the total annual cost in dollars and percent, including riders.
- How long is the surrender period? Get the full surrender schedule and the amount you can withdraw each year without a charge.
- How is the insurer rated? Look for a strong rating from at least one agency.
- What would I get from delaying Social Security instead? Compare the annuity’s payout with the raise you’d get from waiting.
- How long is the free look period? State law usually gives you 10 to 30 days to cancel for a refund.
- How will payments be taxed? The answer depends on whether you use IRA, 401(k), or after-tax money.
How Do You Test an Annuity Before You Buy?
Run the annuity through a plan that includes your Social Security, taxes, and spending. In the Boldin Planner, you can add a future annuity with the account you’d use, the purchase age, and the age payments start. You can include a cost-of-living adjustment and survivor benefits, then compare your plan with and without the annuity.
Try a few versions. Buy now or in 10 years. Start income at 70 or 80, which is how a longevity annuity works. Then see which one keeps your income steady for the least money.
Pros and Cons of Annuities: FAQ
What are the biggest disadvantages of an annuity?
Cost and lost flexibility are the biggest disadvantages of an annuity. Surrender charges can take a cut of your money if you change your mind. Once you annuitize, the lump sum is gone. Fees and commissions also lower what you get back, and a fixed check loses value to inflation unless you paid for a rider.
Can you lose money in an annuity?
You can lose money in an annuity, depending on the type. A variable annuity rises and falls with the funds you choose, and a RILA can lose value past its buffer. Fixed and fixed indexed annuities protect principal. Surrender charges and fees can still leave you with less than you paid if you cash out early.
Can you get out of an annuity after you buy it?
You can get out of an annuity during the free look period, which runs 10 to 30 days in most states, for a refund. After that, cashing out a deferred annuity often means a surrender charge. A 1035 exchange lets you move the money into a different annuity without owing tax. A new contract can start a new surrender period.
Is an annuity safe if the insurance company fails?
An annuity is backed first by the insurer’s own finances, and then by your state’s guaranty association if the insurer fails. In most states, that coverage reaches $250,000 in present value of annuity benefits. Buyers with larger amounts can split them across insurers to stay under the limit.
Can an annuity cover both me and my spouse?
An annuity can cover both spouses if you choose a joint-and-survivor payout. Payments continue until the second spouse dies, though each check is smaller than a single-life payout from the same premium. Some couples pick a survivor benefit that pays a reduced amount after the first death.
What share of retirement savings belongs in an annuity?
The share of retirement savings that belongs in an annuity depends on the gap between your essential spending and your guaranteed income. One common approach is to use an annuity to cover only that gap and keep the rest invested for growth and emergencies. No single percentage fits everyone, so it helps to model the numbers first.
