Annuities sound like a great idea – “guaranteed” returns with income for life – but in reality annuities have yet to live up to the hype and are extremely complex products.
1. Unfavorable tax treatment. Any growth is ordinary income (not capital gain), and you can never take a loss.
2. Annual Expenses. You can find some cheap ones like Vanguard, but most sold annuities have an average insurance expense of 1.5% along with the cost of the mutual funds themselves.
3. Surrender Charges: Most annuities have 7-10 year surrender charge schedules, so that if you take out more than 5-10% in a year, they can assess a cost of 7-10% of the withdrawal. They eventually reduce and go away, but I have seen some that take over 15 years for it to go away.
4. Poor Products: They are often packaged and sold as ‘safe’ investments, in a way that sounds too good to be true. Index based annuities are in our opinion the worst.
5. Estate: Any gains in the annuity are passed on to the heirs.
It is not to say there is no place for annuities, we simply don’t like all of the baggage and cost that come along with them.