The Ultimate Guide To AnnuitiesYour One-Stop Resource for Retirement
What are its disadvantages?
Before buying a variable annuity, there are some drawbacks that you need to consider. For instance:
The payouts will depend in the investments you choose, meaning: a higher investment risk. If the investments you make go down, your annuity will also go down, affecting the payout.
Variable annuities usually face the same obligations than fixed annuities, like pay taxes when a withdrawal is made, a 10% penalty if you decide to retire your money before turning 59 ½ years. But there is a tax twist to consider: The incomes you manage to build up will be taxed as ordinary income rates when you finally decide to withdraw them. For high-income investors, this will mean converting long-term capital gains into ordinary income and paying higher taxes rates.
Variable annuities will also have variable fees. Besides the surrender charge we explained before, variable fees are often subject to sales commissions (usually 4%), management fees and insurance charges. These combined could be around 2% or 3% fee every year, that will be a negative impact into your returns.
You could also consider the benefits of no-load mutual funds, that are sold without commissions or sales charges, you could withdraw your money without paying surrender charges and have expenses of less than 0,50% for index fund and 1,5% for actively managed funds.