Annuities are beneficial to some. For some, it may not work in the best way. The underlying reason may not be the disadvantages of annuities, but the lack of proper shopping, comparative study, and a wise decision. Annuities are helpful in many ways, and they have certain disadvantages as well. The trick is to minimize these disadvantages or surpass them in a way, so that you are always at the gaining end. To be able to judge well, you need to know about the disadvantages of annuities. Therefore, here we present an overview of annuities disadvantages.

Disadvantage brewing from the taxes

The first thing you need to be aware of is your current tax situation, when you buy an annuity. Tax deferred is a feature that lures a lot of investors. In fact, most people prefer annuities because of this unique feature. But, if you do not handle this feature well enough, this can as well turn into a boomerang. How? Let’s see here. When you use this tax-deferred feature, you basically delay paying your taxes or plan to pay them at a later date. Just think: is it better to pay your taxes now or later? It may be advantageous to pay your taxes now if the present tax rate is low and can increase at the ‘later’ date or if you are currently in a relatively lower tax bracket. If an annuity investor overlooks this and defers the capital gains tax till a later date, despite a lower capital gains tax rate at present, most of the gains may get offset when the annuitant pays the taxes later.

When it comes to leaving your annuity to your heirs, particularly, if you have a non-qualified annuity, you are actually leaving your taxes to your heirs. Usually, compared to the senior citizens, the younger work force has a higher tax to pay. Therefore, if your heirs have to pay the taxes on your annuity, they pay more taxes than you would have paid. Naturally, the gains from the annuity are again lower.

Another annuity disadvantage is that any income generated from annuity gains are treated as ordinary income. That is, you do not get the advantages of a capital gains tax, but bear the brunt of heavy income tax. Therefore, comparing the current and projected future tax rates becomes all the more important before you buy an annuity.

Disadvantages from the high surrender charges

Often the clauses of the surrender charges are underemphasized in the annuity contract documents. It is better to be aware of the fact that if you withdraw your gains from the annuity before reaching the age of 59 ½, the government imposes a 10 percent penalty on you. Apart from this, you also need to pay the taxes. Moreover, several annuities may have higher surrender charges, which may impact the gains negatively.

Annuity fees

Apart from the underlying investment fund charges, annuitants have to pay around 1.3 percent on the assets and an additional $27 as administration fee, annually, for "mortality and expense charges." There are a variety of other fees, which the investor needs to be careful of.