Do You Know These Facts About Annuities?

There’s nothing wrong with not knowing something. Heck, since we all specialize in whatever our occupation is, there’s a good chance that most of us know little about most things outside our area of expertise.

There’s nothing wrong with that. So far so good.

The dangerous part is when we think we know something, but we are unknowingly wrong.

Perhaps conventional wisdom has told us something and we never verified whether or not it was true. Perhaps a message keeps getting repeated in the media so much that we no longer even question the fact that it may not be true.

I know for a fact that this happens with annuities. And I’m sure it happens with many other things in life.

So let’s look at 5 facts about annuities that (there’s a good chance) you may not even know about. And let’s look at how this new knowledge could help you in your retirement planning.

So let’s get started with the first fact…

#1. With annuities, most of the time you don’t give up access to your original deposit

Many people believe that once you put your money in an annuity you have lost access to it. They believe that anytime you put money in an annuity it turns into a stream of income. And you can no longer access your original deposit.

That’s not true.

In most cases if you purchase a variable annuity, or a multi-year guaranteed annuity, or even a fixed index annuity, you still have access to your original deposit.

These types of annuities allow your money to grow tax deferred inside the annuity. You don’t have to turn the account into an income stream. You can even pull your money out of the account.

If you are past any surrender charge period you can pull the entire account value out without any surrender charges.

So what types of annuities are the ones where you lose access to your account value?

These are typically Single Premium Immediate Annuities (SPIA’s) and Deferred Income Annuities (DIA’s).

These types of annuities are best used to maximize your income stream. You simply put your money in the annuity and it pays you an income. You do largely lose access to your lump sum with these types of annuities.

That’s why they should be used wisely. They are great at increasing your guaranteed income floor in retirement. But you’d never want to put too high of a percentage of your savings in one.

In fact the amount of money you should put in any annuity is “as little as possible to accomplish your goals.”

So most annuities (as long as they are not a SPIA or a DIA) will still allow you access to your original deposit and the growth you have had on that deposit.

But not everyone knows this. The result: if causes many people to not consider ANY annuities. Which is a shame because they can be very good financial products, especially for retirement planning, when used properly.

#2. Not all annuities have surrender charges

That’s right. Not all annuities have surrender charges.

Most do have surrender charges. But there are some that do not.

No-Load Variable Annuities are the ones that typically have no surrender charges. These types of variable annuities keep the fees low, and they completely eliminate surrender charges.

They are different from the regular run-of-the-mill Variable Annuities that typically have a 7 year surrender charge with high internal fees.

No-Load Variable Annuities are best used for non-qualified (i.e. non-IRA money) money that is actively traded in the market.

Since the funds are inside an annuity wrapper, any capital gains generated from selling a security are not taxed. This allows more of your money to remain in the account and continue to grow.

That’s why a No-Load Variable Annuity is good for non-qualified funds that are actively traded.

The downside to this is that when you do withdraw funds from the annuity, the gains will be taxed at income tax rates, which are typically higher than capital gains tax rates.

#3. Annuities typically don’t “lock up” all your money

Some people think when they buy an annuity they are saying, “Good bye money, I’ll see you in 10 years after the surrender charges are over.”

But the reality is not all your money is locked up.

For instance, most annuities will allow you to pull 10% of your account value out after the first year.

Also, if you have an income rider attached to an annuity, it will allow you to activate it and receive income (with no surrender charges) even if the surrender charge period is still in effect.

As we’ve seen in fact #2 above, the No-Load Variable Annuity always allows you to have access to your account value with no surrender charges.

And some annuities today even have Return of Premium options. These allow you to surrender your contract and get all of your original deposit back (less any previous withdrawals). You can even do this during the surrender charge period without paying surrender charges.

And lastly, it is very common today for many annuities to allow you access to all of your account value surrender charge free if you have a terminal illness or enter into a nursing home.

Be sure to check the specifics of the annuity you are considering as they are all slightly different on how you can access your money.

#4. Income rider “roll-up rates” are largely irrelevant

This may come as a shocker for you to hear this (unless you have read/watched many of my past articles/videos), but the income rider roll-up rates that are so heavily advertised are pretty much useless information.

The income rider gives you a guaranteed income at some point in the future. Your goal should be to maximize whatever the income payout will be.

The roll-up rate just increases the Income Account Value. And it is true that the higher the Income Account Value, then the higher your actual income guarantee will be.

But there is another factor at play too. It’s called the Distribution Rate. That is the percentage they multiply the Income Account Value by to determine your income guarantee.

The math is pretty simple, but the marketing can be rather deceiving.

If an insurance company wanted to make its new annuity income rider look awesome, they could increase their roll-up rate… then they could decrease the Distribution Rate (and conveniently not advertise that fact).

The interaction between the roll-up rate and the Distribution Rate will determine the only thing that matters: The Payout Rate.

You want to maximize the payout that you get from your investment. Everything else is just noise. Please ignore it. I have discussed this in great detail here. Be sure to check it out.

#5. Some annuities have no fees at all

The last item in this facts about annuities list may come as a shocker to you. But some annuities have no fees at all.

That’s right.

Multi-year guaranteed annuities are one example. These are like CD’s. They guarantee a fixed rate for a specific time period, say 5 years. You put your money in and it grows at the guaranteed rate. No fees taken out.

The same applies for most fixed index annuities. As long as you don’t attach an income rider to a fixed index annuity, most of them will have no fees.

Of course the insurance company has certain expenses it must cover. But it internally prices these expenses. They don’t charge a recurring fee that reduces your account balance.

So even in years when your fixed index annuity does not earn anything, you won’t have to worry about it decreasing in value due to fees. Unless of course you added an optional rider to it for a fee.

So why do annuities get a bad reputation for having high fees?

The answer in 2 words is: Variable Annuities.

Variable Annuities are notorious for having fees. (And I’m not talking about the No Load Variable Annuities).

It is common for a Variable Annuity to have fees that exceed 3%.

Here’s a video I did in the past where I actually walk through a Variable Annuity prospectus and show you how to find all the fees hidden inside these things.

But not all annuities are like this. And some actually have no fees at all.

Those are your 5 facts about annuities… Now what?

My opinion on annuities is that they can make sense as a portion of a well thought out retirement plan. But often times they are mis-sold to the public. And this hurts consumers and makes it harder for them to realize their retirement goals.

This can also give annuities an unjustified bad reputation. This can also hurt consumers because many will hear someone say something like, “All annuities are bad,” and then never look into the benefits they can provide in retirement planning.

The fact is annuities are good at some things and not good at others. This is typical of any investment. You just want to be sure that when you speak to an adviser they are not telling you that an annuity will do some things that it was never originally designed to do.

The 2 primary reasons for which I see most people considering annuities is to 1) protect their money and 2) guarantee an income. These are 2 things fixed annuities are designed to do.

There are other uses, but these are the most common ones.

For protecting principal fixed annuities are often used to generate a conservative rate of return with no market risk.

For generating income, there are many annuity options. Immediate Annuities, Deferred Income Annuities, Variable Annuities with Income Riders, or Fixed Index Annuities with Income Riders.

When used correctly they can be great in a retirement plan. When used incorrectly they can be horrible.

And if there is mis-information out there that prevents some people from even considering annuities in the first place, then a lot of these good benefits will go unused by some people.


Hope this article helps in clarifying some facts about annuities that you may not have known. If you know someone that is considering an annuity and they need some additional help, please forward this article to them.

You can also share it with all your friends on Facebook by clicking the icon on the left of the screen. We can reach more people with this message working together than I could ever do on my own.

And if you are struggling with an annuity decision, then be sure to download my e-book “How To Avoid Annuity Traps.” It will show you some of the common pitfalls people unnecessarily make when purchasing an annuity and how you can effortlessly avoid them.

Best regards,

Chris Hammond

5 Facts About Annuities You Probably Didn't Know