Personal Finance: What are the pros and cons of annuities?
Like any investment vehicle, an annuity has both good and bad points. The two biggest features in favor of an annuity are tax-deferred accumulation and safety. Historically, annuities have been very safe vehicles in which to invest and, with rare exception, there have been few defaults in this area. In addition, the tax-deferred accumulation allows for a significant additional accumulation of funds over and above what could be earned in a taxable vehicle. However, you should remember that an annuity is a long-term accumulation vehicle. If the contract is surrendered prior to age 59 1/2, there is a 10% excise tax penalty levied. The advantage of tax-deferred accumulation is that eventually the additional earnings through tax deferral can offset this excise tax penalty. As a rule of thumb, you should plan on holding a deferred annuity approximately 15 years before liquidation (this can change depending on your tax bracket), if you plan on having your liquidation occur prior to age 59 1/2
