Why it matters
- This article will help you learn what annuities are, how they work, and what they can offer.
- Today’s annuities may provide more than retirement income – they could help you and your family meet more near-term financial goals.
- Variable annuities may offer higher returns than other investment types. On average, investors in variable annuity average equity subaccounts saw an average return of 23.59% in 2023, compared to an average gain of 20.79% for the average equity mutual fund investor.1 (Past performance is not a guarantee of future results.)
Think annuities are just for retirees? Think again! These powerful financial tools offer surprising benefits that can help reach your financial goals at any stage of life.
What is an annuity?
Let’s start with a few basics. An annuity is a long-term insurance contract. You pay an insurance company to invest your money and any growth is tax-deferred. When you retire, you can use that money to provide an income stream for a set number of years, or even the rest of your life. There are different types of annuities available, including fixed, variable, and indexed. One of the main differences between them is how the rate of return is determined. Fixed provides a fixed rate, variable varies based on investment performance, and indexed offers capped growth linked to an index.2
Another difference is the upside potential of each, or how much you can make from your investments. Fixed annuities typically have the lowest, variable annuities have the highest, and indexed annuities are in the middle because of their capped growth. The reason for those differences in upside potential is the downside risk of each one. The lower the risk, the lower the potential for growth. It’s a trade-off. So, it’s not surprising that fixed annuities have no downside risk, variable has the highest risk, including the risk of possible loss of principal, and indexed has limited or no risk.3
Now that you know the basics, let’s go over four facts about annuities that just might surprise you.
Fact number 1: They provide opportunities to grow your money.
For example, who would you think had better investment performance in 2023 — the average variable annuity investor or the average mutual fund investor? If you guessed the variable annuity investor, you guessed right. On average, investors in variable annuity average equity subaccounts saw an average return of 23.59% in 2023, compared to an average gain of 20.79% for the average equity mutual fund investor.1
Why the difference in performance? It may be because the average variable annuity investor tends to hold on to their investment, and the average mutual fund investor tends to trade more frequently. Additionally, the average variable annuity investor typically allocates more of their portfolio to equities compared to mutual fund investors. This more aggressive allocation may lend itself to higher returns, especially in years when markets are stronger, like in 2023.1
Fact number 2: They may have lower fees than you thought.
In fact, some annuities have NO fees. That’s 0%. It doesn’t get much lower than that. And the average annual fees on a variable annuity are 3-4%. In general, the simpler the annuity, the lower the fees. Adding riders, or special enhancements, to your annuity contract can add fees. But they may also help you meet specific financial goals like lifetime income payouts, death benefits, or long-term care insurance.4
Fact number 3: They can help you leave a legacy.
Annuities with a death benefit let the owner select beneficiaries for the remaining money in the annuity or a guaranteed minimum. Owners can specify how it’s paid out in the contract, typically in a lump sum or spread out into payments over time.5
Fact number 4: They’re more liquid than you think.
The fact is annuities typically have withdrawal options that don’t require surrender charges — you can withdraw your money when you need it.7 That said, most annuities do have some surrender charges. Which means you may have to wait a few years to withdraw money without paying charges, although a percent of premium may be available to withdraw without fees.5
As always, it can help to consult a financial professional to determine the best approach for you.
Things to consider
- The fees you’ll pay vary depending on the type of annuity you choose. Fees are often tied to optional riders that can help you meet specific financial goals.4
- In certain circumstances, annuities can help reduce the tax burden on your beneficiaries.7
- When purchasing an annuity, it’s important to consider your goals and financial situation. A financial professional can help you determine if an annuity makes sense for you.
1 “2024 Quantitative Analysis of Investor Behavior Report: Variable Annuities,” Dalbar, August 2024
2 “Annuities” Investor.gov
3 “Indexed Annuity: Definition, How It Works, Yields, and Caps,” Investopedia, July 2024
4 “Variable Annuity,” Annuity.org, December 2024
5 “Annuity Beneficiary,” Annuity.org, January 2025
6 “Surrendering an Annuity,” Annuity.org, July 2024
7 “The Tax Rules to Consider Before Buying an Annuity,” Kiplinger, October 2024
Any guarantees are backed by the claims-paying ability of the issuing insurance company.
Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal professionals and financial professional regarding their particular situation and the concepts presented herein.
Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.
