How to avoid annuity pitfalls

If you’re looking for stable, long-term income in retirement as opposed to quick returns, annuities can be an attractive option. They can turn your hard-earned savings into a stream of reliable payments, offering peace of mind as you plan for retirement. But like all financial products, annuities have risks and drawbacks. 

By learning about common annuity pitfalls, such as high fees, inaccessibility of funds, and tax limitations, you can protect yourself and choose the right annuity for your immediate and long-term needs. Equally important is finding a provider who prioritizes transparency and integrity.

This article explores problems with annuities, how to avoid them, and why Gainbridge may be your ideal partner in retirement planning.

4 annuity pitfalls and how to avoid them

Annuities can offer regular payments, which helps make them a powerful tool for financial security in your retirement plan. But while they can provide a stable source of income and may protect you from market crashes during your retirement years, they’re not perfect.

Here are four common annuity pitfalls to be aware of.

1. High fees

Annuities may come with substantial fees that can erode your earnings and diminish the total payout. Let’s look at the types of fees that can reduce the value of an annuity.

Management and administrative fees

Annuity contracts often have built-in management fees that gradually cut into your total earnings. Providers justify these fees by citing vague services, like account management and contract maintenance. You feel compelled to pay because the services sound so critical but they may not all be necessary.

Before you buy an annuity, you should compare admin fee structures across providers and look for transparency in disclosures. If a service doesn’t match your goals, it’s likely unnecessary. If you are looking for predictability, consider low-cost, fixed rate annuities from trustworthy, well-reviewed providers. If you are looking for more growth potential and you’re comfortable with additional risk and typically higher management fees, consider variable rate products.

Rider costs

Many annuity providers offer optional riders, such as death benefits and guaranteed lifetime income. Some of these options are worthwhile when they align with your long-term needs. However, each one could add significant costs, so only opt in for the riders after careful evaluation. Some riders also may be included for no extra fee, making it important to review the details carefully. 

Surrender

Surrender charges are mandatory penalties you’ve to pay if you withdraw funds before your contract with the insurance provider is scheduled to end. The risk of surrender is one of the biggest disadvantages of annuities — especially if you end up in an unexpected emergency and need your money quickly.

To avoid early withdrawal penalties, look for products with more flexibility and make sure you understand the surrender schedule before you buy.

2. Liquidity and Flexibility

Liquidity and flexibility can help determine how useful your annuity is in real life. Most annuities impose strict rules on withdrawing funds early, above the free withdrawal limit. If you think you might need your money before the annuity is due to end, you should carefully review the terms and fees in the contract you sign. 

Here are some things to look for in your contract.

Surrender period restrictions

Most annuities restrict withdrawals above a certain amount, especially early in the contract period. Accessing your deposits ahead of schedule could result in frustrating penalties and potentially reduces your payout. If you think you might need to make early withdrawals, opt for annuities with shorter surrender periods or a different financial product.

Free withdrawal provisions

If you suspect having to pull out money multiple times, maybe for family or business responsibilities, you should pick an annuity that accommodates early withdrawals, like Gainbridge’s FastBreak™. It lets you make penalty-free withdrawals of up to 10% of your initial premium.*

Rigid contract terms

Life isn’t always predictable. Your financial products should give you flexibility when you need it. Some annuities keep buyers locked in, without the ability to make adjustments if your financial situation changes. Carefully review terms before you sign, and look for providers that offer flexible terms.

3. Tax drawbacks

Annuities are appealing because the earnings typically grow tax-deferred, but the tax rules surrounding withdrawals aren’t always favorable. Here are potential complications you need to plan for.

Deferral vs. withdrawal taxation

While some annuities grow tax-deferred, withdrawals are taxed as ordinary income rather than capital gains. Depending on your tax bracket and other sources of income, this may mean paying more taxes. It’s possible to minimize your total tax burden by planning your withdrawal schedule ahead of time with the help of a tax specialist or financial advisor.

Required minimum distributions ambiguity

If you hold your annuities in a tax-advantaged retirement account, you might be subject to required minimum distributions. This means you’ve to withdraw a certain amount on a set schedule in retirement — whether you need the money or not — triggering taxation. But these rules aren’t always clearly stated. A trustworthy provider should answer your questions in an upfront, easy-to-understand way.

4. Inflation

Fixed rate annuities provide stable, predictable income. But like many lower-risk investment options, the returns don’t always keep up with inflation, which can erode your purchasing power over time.

Some contracts offer inflation-adjusted payouts to help mitigate this issue. However, if quick growth is your priority, you may want to consider other higher-risk options.

Exercise caution

Pitfalls aren’t reasons to avoid annuities, just reminders to proceed carefully. 

The key to investing smartly is evaluating the pros and cons of annuities and choosing a reliable product that’s tailored to your retirement planning needs. Independent research will take you a long way, but ultimately you’ll need reliable options and expert advice. 

Gainbridge provides comprehensive resources to help you understand the ins and outs of buying an annuity.

Choosing the right provider

Before you put your money toward any investment, do your due diligence on what you’re buying. Carefully review both the financial product and the provider offering it.

Purchasing an annuity means agreeing to the insurance company’s terms for fees, payouts, tax rules, surrender charges, and more. The provider’s financial strength and service approach also should be considered. Finding the right provider can be crucial — a poor choice could lock you into an unfavorable contract for years.

Some ways to assess providers are:

• Evaluate financial strength ratings: Look for positive ratings from reliable agencies like S&P Global, AM Best, or Moody’s.
• Read customer service reviews: Review complaint ratios on the National Association of Insurance Commissioners (NAIC) website and consider reviews from multiple websites.
• Research past claims: Seek out providers with a proven track record of honoring claims.
  

Before you buy an annuity make sure you get all your questions answered. Consider your needs, research a variety of different products and providers, and weigh your options before committing.

How Gainbridge helps you avoid annuity pitfalls

Choosing the right annuity isn’t just about picking a product that suits your needs on paper. It requires a thoughtful review of how the product fits into your goals and overall financial objectives, fee structures, flexibility features, withdrawal and tax restrictions, and the financial stability of the insurer. 

Gainbridge is committed to simplifying this process, making it easier to access and evaluate annuity options. Our platform lets you compare trustworthy annuity products and get personalized assistance from our team of professionals. 

Here’s what you can expect.

Straightforward, low-cost products

Gainbridge offers fixed  annuities with easy-to-understand terms and straightforward fee structures, designed to meet diverse needs. Whether you’re looking for stability, predictability, or guaranteed income, we’ve got you covered.

Financial strength

Integrity and stability are at the core of all we do. The issuer of our annuity products, Gainbridge Life Insurance Company, holds an A-(Excellent) rating from AM Best. 

Gainbridge has a proven track record of honoring guarantees, and our products are backed by trusted insurers.

Personalized customer service

Our customer service team comprises licensed staff who are not only qualified to answer your questions, but genuinely care about your immediate and future financial goals. 

With Gainbridge, you don’t need to worry about paying unnecessary commission fees, and you can always take out up to 10% free withdrawal annually without withdrawal charges or market value adjustments*. We believe financial products should accommodate users — not the other way around. So we provide products that can give you the flexibility you need. Our professional team is available via phone, email, and live chat.

Avoid annuity pitfalls with Gainbridge

At Gainbridge, we don’t sell you what you don’t need. Our educational resources can help you understand both why and why not to buy an annuity, depending on your goals. What’s more, you get direct access to annuities with no hidden fees or commissions.

Explore Gainbridge today to learn about different annuity products and access flexible options.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

*Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income. FastBreak™ is issued by Gainbridge Life Insurance Company, a Delaware-domiciled insurance company with its principal office in Zionsville, Indiana and is licensed and authorized to do business in 49 states (all states except New York) and the District of Columbia. Products and/or features may not be available in all states. Guarantees are based on the financial strength and claims paying ability of the issuing insurance company. FastBreak™ is not a tax-deferred annuity. Because this annuity is not tax-deferred, you will not pay a 10% federal excise tax on any interest you withdraw before you reach age 59 ½. Withdrawals above the 10% free withdrawal amount are subject to a withdrawal charge and/or market value adjustment. Please visit gainbridge.com for current rates, full product disclosure and disclaimers and additional information.

Financial Strength Ratings for Gainbridge Life Insurance Company as of December 24, 2025. Ratings are subject to change.

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