Common Annuity Myths and the Truth Behind Them

Annuities have long carried a reputation for being confusing, costly, or simply not worth the trouble. For many people, the word itself triggers skepticism. Yet that skepticism is often built on incomplete information passed down through casual conversation rather than facts.

Misconceptions about annuities are surprisingly widespread. According to a 2024 survey, about 79% of American adults struggle to define an annuity correctly. When that many people lack a basic understanding, myths quickly fill the gap.

The reality is that annuities are neither universally good nor universally bad. Like any financial product, their value depends on a person’s goals, risk tolerance, retirement timeline, and income needs.

Understanding the facts behind common annuity myths can help investors make more informed decisions. They can determine whether these products deserve a place in their long-term financial strategy.

Myth #1: All Annuities Come With High Fees

Fees are a legitimate concern with some annuity products, particularly variable annuities. But painting all annuities with the same brush is inaccurate.

Many annuity types carry little to no fees. Fixed annuities and fixed-indexed annuities, for instance, are structured around interest-rate guarantees rather than investment subaccounts. This means there are no annual management fees eating into your returns.

As financial planner Nicholas Bunio, CFP, says, “Fixed annuities and fixed index annuities don’t really have any fees unless you add some type of rider.” Riders are optional. If you do not add them, you avoid those costs entirely.

Variable annuities do tend to be more expensive, often carrying annual charges that can exceed 2%. But even within that category, simpler products from providers like Nationwide can come in meaningfully below that threshold.

The practical takeaway is that the fee picture varies significantly by product type. Comparing fee structures across specific products, rather than assuming all annuities are expensive, leads to much better decisions.

Myth #2: Annuities Only Benefit Wealthy Retirees

Some people assume annuities are sophisticated financial instruments only accessible to people with large portfolios. Annuities span a wide spectrum of entry points, depending on the insurer and product type. The purpose of an annuity is most relevant to people who do not have large investment portfolios to draw on in retirement.

Think about who benefits most from a guaranteed monthly payment. It is someone who does not have a pension, is uncertain about Social Security’s long-term future, and worries about outliving their savings. That describes a significant portion of middle-income Americans, not the wealthy.

Funding an annuity with after-tax dollars is a common approach many people use outside of retirement plans. According to 1891 Financial Life, this can be done through non-qualified annuities. They allow investments to grow tax-deferred.

In a non-qualified annuity, the holder only pays taxes on the earnings when they begin withdrawing, not on the original principal. This structure makes annuities accessible and tax-efficient even for those working with modest savings.

Myth #3: Annuities Provide No Flexibility

Related to flexibility is the belief that once you put money into an annuity, it disappears into a vault you cannot access.

It is true that annuities are not liquid investments in the way a savings account or brokerage account is. That’s because they are designed for long-term income planning. Therefore, early withdrawals typically come with surrender charges during the first several years of the contract.

However, most contracts allow partial withdrawals of up to a certain limit of the account value per year without penalty. Many also include provisions for accessing funds in cases of medical emergencies or long-term care needs.

Mary Stork, senior vice president and general manager at USAA Retirement and Investment Solutions, described immediate annuities straightforwardly. “You pay once, and the income starts right away — usually within 12 months,” she said.

This is one of the reasons why 76% of annuity owners are confident in retirement. That clarity of structure is actually a feature, not a trap. Knowing exactly when and how you will receive income is precisely why many retirees find annuities appealing.

The key is matching the right product to your liquidity needs. If you need ready access, you keep the funds in liquid accounts and allocate only a portion to an annuity.

Can annuities be customized to fit different retirement goals?

Many annuities offer optional features that allow policyholders to tailor the contract to their needs. Income riders, death benefits, inflation protection options, and various payout structures can help align the annuity with specific financial objectives. The level of customization depends on the product and the insurance company offering it.

Myth #4: Guaranteed Income from Annuities Is Not Really Guaranteed

Some critics argue that the word “guaranteed” is misleading, that annuity payments could fail if the insurer goes under. This concern is worth taking seriously, but it should be placed in proper context.

Annuities are contracts backed by the financial strength of the issuing insurance company. Insurers are regulated at the state level and are required to maintain specific capital reserves. They are also regularly rated by independent agencies like AM Best and Standard & Poor’s.

Additionally, insurance guaranty associations provide a safety net for policyholders if an insurer becomes insolvent. While it does not cover the full amount, it can still be helpful. Choosing an insurer with a strong financial rating, ideally A or higher, substantially reduces this risk.

As Rona Guymon, senior vice president of Nationwide Annuity Distribution, explained, “Annuities are one of the only investment vehicles that can provide guaranteed income for life, no matter how long someone lives and regardless of the economic environment – and advisors are doing a great job conveying that information to their clients.”

What factors support the guarantees offered by annuities?

Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. Insurers maintain reserves and operate under regulatory requirements designed to support their contractual obligations. Investors should review an insurer’s financial strength ratings from independent rating agencies before purchasing an annuity to better understand its financial stability.

Myth #5: Annuities Are a Niche Product Nobody Actually Uses

Some people believe annuities are obscure products that only a small segment of retirees bother with. But the data tells a very different story.

About 6.3 million U.S. households currently own at least one annuity. Two-thirds of annuity-owning households are age 65 or older. The data is based on a 2024 analysis conducted on behalf of the U.S. Department of Labor’s Employee Benefits Security Administration.

Interest in annuities has also been growing steadily. Annuity sales reached record levels in recent years, driven by an aging population seeking reliable income and a volatile economic environment that made guaranteed returns far more appealing.

As The Guardian reported in January 2025, annuities “are definitely having a moment.” Sales are on the rise, and more retirees are likely to consider them following changes to pension inheritance tax rules. This is not a niche product. It is a mainstream retirement tool with growing relevance.

Who typically purchases annuities today?

Annuity buyers come from a wide range of backgrounds and income levels. Some are retirees seeking guaranteed income, while others are pre-retirees building future income streams. Business owners, professionals, and individuals approaching retirement often consider annuities as part of a broader financial strategy.

Key Annuity Statistics at a Glance

Annuities continue to generate debate, largely because misconceptions often overshadow the facts. While certain concerns about fees, flexibility, and complexity may apply to specific products, broad generalizations can distort how annuities actually work.

A thoughtful evaluation requires looking beyond common myths and examining the details of individual contracts. Investors who understand these misconceptions are better positioned to determine whether an annuity aligns with their financial goals. Separating fact from fiction allows for more informed decisions and a clearer understanding of the role of annuities in retirement planning.