Complaints about Variable Annuities

For retirees, or near-retirees, who are interested in tax-deferred growth and a predictable source of income in retirement, annuities are a potential savings method.  Admittedly, these features come at a price, and the annuity companies will make money off of your investment as well.  Some annuitants want to exchange some of the predictability of the annuity in for a chance to earn slightly more money during times when investment returns are higher.  A variable annuity provides that opportunity: when the market is doing well, the annuity pays more than the basic annuity would, and when the market is suffering the annuity pays less.  Although some investors are happy with their results from these retirement savings devices, there are also many complaints about variable annuities.  The complaints tend to fall into three categories:

Costs.  Variable annuities are much like other annuities as far as the first category of complaints go.  They cost more than most other retirement savings methods.  The company that provides the annuity will do so on terms that ensure it to make money off the deal.  The amount that the annuity company pays the annuitant will be less than they intend to make by taking the annuitant’s money and investing it elsewhere.  Usually these companies are large insurance companies that are adept at spreading risk and placing money into investments that will pay predictably.  The annuitant is almost always paying a premium to have the insurance company take money, invest it, and pay back less than the returns received.  Annuitants often accept this because the benefit of an annuity is that it is low risk.

Risk.  Not so with the variable annuity.  Because the return of a variable annuity is tied to the financial markets, the annuitant who buys one is losing one of the main benefits of an annuity (low risk returns) and getting nothing in its place.  Annuity companies do not tend to reduce their cut of the investment returns just because the annuitant bought a variable annuity.  Investors who buy a variable annuity do so because they are making another trade-off: accepting some risk that the investment will lose value in some years in the hopes that it will make more in other years.

Predictability.  And this leads to the third major category of complaints about variable annuities: they are unpredictable.  Although they are still a tax-deferred way to save for retirement income, they do not provide the steady predictable monthly payment that makes the annuity attractive to so many investors.

By combining these three areas of concern, many people consider the variable annuity a poor investment choice because they lack the major benefits of an annuity and combine the major faults of an annuity and also the faults of financial market investments as a whole.  Many investors consider variable annuities to be the worst of both worlds.  For investors who have other tax deferred savings methods available, there are likely to be other options that provide returns as good as the variable annuity if not better, without any appreciable difference in risk.