What Annuity Sales Pitches Often Leave Out — Why a “Guaranteed” Retirement Income Can Still Create Constraints (Updated: Jan 2026)
“What annuity sales pitches don’t tell you” is often discovered too late—after the contract is already signed.
Many people exploring retirement income options are told that annuities offer protected principal and lifetime income, yet still feel uneasy once they start reviewing the fine print.
The short answer is this: annuities are not inherently bad products, but they can become inefficient or restrictive when key structural details are misunderstood or overlooked.
This article is written for educational purposes only, providing a tax-focused retirement planning perspective on what annuity sales pitches often leave out.
- 1️⃣ Liquidity: When Your Money Isn’t Easily Accessible
- 2️⃣ The “Guaranteed Return” Illusion (Income Base vs Account Value)
- 3️⃣ Layered Fees That Quietly Reduce Long-Term Value
- 4️⃣ Taxes: Deferral vs Actual Tax Treatment (Ordinary Income, LIFO, 10% Penalty)
- 5️⃣ Questions to Ask Before Accepting an Annuity Recommendation
- 6️⃣ When an Annuity May Fit a Retirement Plan
1️⃣ Liquidity: When Your Money Isn’t Easily Accessible
One of the least emphasized aspects of annuities is liquidity.
Many annuity contracts include a surrender period, commonly lasting 7 to 10 years.
During this period, large withdrawals or contract termination may trigger surrender charges.
Suppose you allocate $350,000 to an annuity at age 67.
Three years later, an unexpected healthcare expense requires $60,000 in cash.
→ Depending on contract terms, withdrawals may be limited or subject to surrender charges.
→ What felt like a “safe” income solution may turn out to be less flexible when cash is actually needed.
In retirement planning, long-term returns matter — but access to cash at the right time often matters more.
This is why understanding surrender rules and withdrawal limits is essential before committing funds.
2️⃣ The “Guaranteed Return” Illusion (Income Base vs Account Value)
Phrases like “6% or 7% guaranteed growth” are frequently used in annuity discussions.
However, this figure often applies to an Income Base (or Benefit Base) — a number used solely to calculate future income payments.
The key distinction is this:
the Income Base is typically not a balance you can withdraw as cash.
Actual withdrawals are usually limited to the Account Value.
✔ “Guaranteed growth” does not necessarily mean your cash balance is growing at that rate
✔ The figure may apply only to lifetime income calculations
✔ Lump-sum withdrawals are usually based on Account Value, not the Income Base
Before relying on any quoted return, it’s critical to confirm which base the percentage applies to.
3️⃣ Layered Fees That Quietly Reduce Long-Term Value
Annuity costs are rarely presented as a single number.
Instead, they are often embedded across multiple components and deducted annually.
- Mortality & Expense (M&E) fees
- Optional rider charges
- Underlying investment or index-related management fees
Even a difference of 1–2% per year can materially affect outcomes over a long retirement.
Reviewing the total annual cost — not just individual line items — is essential.
4️⃣ Taxes: Deferral vs Actual Tax Treatment (Ordinary Income, LIFO, 10% Penalty)
Annuities are often described as “tax-free,” but a more accurate term is tax-deferred.
Taxes are postponed — not eliminated.
✔ Earnings are generally taxed as ordinary income, not capital gains
✔ Unlike stocks or real estate, annuities typically do not receive a step-up in basis at death
✔ The order in which money is taxed matters
For many non-qualified annuities, withdrawals follow the LIFO (Last-In, First-Out) rule.
This means earnings may be taxed before principal is returned.
You invest $250,000 in an annuity that later grows to $300,000.
Withdrawing $40,000 may result in that amount being treated as taxable earnings first, rather than a return of principal.
Additionally, withdrawals of earnings made before age 59½ may be subject to an additional 10% federal tax penalty, unless a specific exception applies.
If you already hold tax-advantaged accounts such as IRAs, layering another tax-deferred product inside them can sometimes resemble duplicating tax deferral without adding flexibility.
5️⃣ Questions to Ask Before Accepting an Annuity Recommendation
This article does not evaluate specific providers or products.
Instead, it aims to help readers ask better questions before making a decision.
- How long is the surrender period, and what are the withdrawal or termination charges?
- Does the quoted return apply to the Income Base or the Account Value?
- What is the combined annual cost of all fees?
- How are withdrawals taxed, including LIFO rules and potential early-withdrawal penalties?
- How does this annuity fit alongside existing retirement accounts?
Suitability depends on liquidity needs, retirement timing, income sources, and marginal tax brackets.
Clear answers to these questions help align expectations with reality.
6️⃣ When an Annuity May Fit a Retirement Plan
Annuities are not universally inappropriate.
In certain situations, they may serve a defined role within a broader retirement strategy.
- Core living expenses are already covered, and additional predictable income is desired
- Reducing exposure to market volatility improves peace of mind
- Funds committed to the annuity are not needed for liquidity during the surrender period
The key takeaway is simple:
annuities tend to work best as a component of a retirement plan — not as the plan itself.
This article is for general educational purposes only and does not constitute investment, insurance, or tax advice.
Tax treatment, fees, and withdrawal rules vary by annuity type, contract terms, state regulations, and individual circumstances.
Always review official disclosures and consult appropriate professionals before making financial decisions.