blog & articles

Blog List

The Society of Annuity Facts and Education (SAFE) responds to “Lifetime income? Tax deferral? What investors should know about annuities”


Dear Ms. Mercado,


Although we have had a long-time relationship with you, we were surprised to find that now that you are publishing content with CNBC’s FA Playbook, without using our fact-checking services. As you know, we are always interested in discussing the facts about annuities.  That said, we found some errors in your article “Lifetime income? Tax deferral? What investors should know about annuities,” and would like to clarify some misconceptions.


It is important to establish that annuities are insurance, not intended to perform favorably against investments. Insurance has a cost. For that reason, the performance of even variable annuities (which offer the greatest potential return of all annuity types) will not be similar to investments with no insurance component. Likewise, investments and insurance have different features. Therefore, it is disingenuous to compare annuities to investments; these products are not intended to address the same objectives.


Some of the points we would like to make follow:


  • Annuities guarantee tax-deferral, not “potential tax-deferred growth.”


  • Most annuities allow the purchaser to withdrawal at least 10% of their annuity’s value each year, without being subject to surrender penalties. Some allow withdrawals of as much as 50% of the annuity’s value, penalty-free.


  • The surrender charges on annuities are the feature that permits the insurance company to credit relatively-competitive rates on annuities. The bonds that insurance companies invest the annuitants’ premiums in have early redemption penalties. As such, the insurance company suffers a loss, should the annuitant need access to the annuity’s value, prior to the end of the annuity’s surrender charge term. In response, insurance companies have developed surrender charges, as a method of mitigating the risk of annuity purchaser’s needing access to more than the penalty-free withdrawal amount that they are permitted each year.


  • In addition to the aforementioned penalty-free withdrawal provision, annuities offer multiple ways that purchasers can “get the money out of” the contract. Most contracts offer surrender charge waivers, which grant the purchaser access to the annuity’s funds in the event of nursing home confinement, terminal illness, unemployment, and more. Many annuities offer living benefits, which also provide access to the annuity’s values. Most fixed and indexed annuities pay the contract’s full account value to the designated beneficiaries on death, and many variable annuities offer attractive death benefits as well. Lastly, every annuity grants the purchaser the right to annuitize their contract, and receive a guaranteed paycheck for the reminder of their lives.


  • There are two types of annuities: deferred annuities (which defer the income payments, so as to allow the purchaser to continue earning interest) and income annuities (which generally begin making income payments to the purchaser within the first year of the contract). Income annuities are not a type of fixed annuity; there are both fixed and variable income annuities, however.


  • Fixed annuities do not have fees, explicit or implied.


  • Insurance companies do not “charge an implicit fee through caps, participation rates, and spreads” on indexed annuities. In fact, the insurance company does not retain any index performance above-and-beyond the participation rates, caps, and spread rates on indexed annuities. The participation rates, caps, and spread rates declared on these products are a function of option pricing, and the market’s performance above these rates is not retained by the issuing insurance company.


  • In actuality, annuities are available with no surrender charges at all, with surrender charge of up to 16 years, or anywhere in between this range.


  • Fixed annuities function very similarly to certificates of deposit (CDs). However, CDs tend to credit considerably lower rates than fixed annuities: presently the national average on CDs is only 0.88% (taxable)1, while the average on fixed annuities is 3.13% (tax deferred)2. Yet, fixed annuities guarantee that the purchaser will earn a specified rate of interest every single year of the contract in addition to guaranteeing a paycheck-for-life. This is a value proposition that is unmatched by CDs.

Overall, we would caution that it is reckless to generalize annuities in the manner this article did. As you are aware, only variable annuities have explicit fees, such as the B-share this article referenced; these are not a function of fixed nor indexed annuities.


The #1 fear of Americans is running-out-of-money in retirement. Annuities are the only financial instrument that can guarantee the purchaser an income they cannot outlive. As a result, it would seem appropriate that annuities are strategically, and solely-positioned to properly address the concerns of our nation.


While a mixture of stocks and bonds may be appropriate for some, this combination will not solve the purchasers’ needs for a guaranteed paycheck for the rest of their lives. SAFE supports that idea that it is best to listen to each individual consumer’s concerns, needs, goals, and objectives, before suggesting products as a solution. No solution is omitted for consideration prior to such a discussion. This method ensures that each client’s purchase is truly what is in their best interests.


As with all financial products, we encourage consumers to do their research, understand all the terms and, based on their own circumstances, decide what is best for them. Whenever possible use a trusted financial adviser and understand their licenses, know their background and their experience.


Annuities are not right for everyone. And no one should put 100% of their assets into an annuity. However, annuities are a logical solution for many. Providing clear, accurate, and concise information about these products is imperative at a time that our nation is ultra-concerned about retirement income options. Your cooperation in this endeavor is so very appreciated.




Sheryl J. Moore
Chief Research Officer
The Society for Annuity Facts & Education
(800) 952-SAFE