Pros and Cons of Immediate Annuities: A Must Read

Written by Hersh Stern Updated November 12, 2025

Big decisions can be overwhelming. Sometimes the best thing to do is to make a list of the pros and cons when considering your options.

If you’re still unsure whether an immediate annuity is right for you, read through our list of immediate annuities pros and cons to help with your decision.

The pros:

Guaranteed Income

If you think Social Security, your pension (if you have one), and your savings may not be enough throughout your retirement years, you can guarantee lifetime income with an immediate annuity. Guaranteed income can be a great source of security and peace of mind.

Avoiding Market Downturns

With an immediate annuity, your payout rate is guaranteed for the duration of the annuity. This means that the markets taking a nosedive will not impact your immediate annuity payout.

While an annuity doesn’t have the same risk of loss as do investment products like mutual funds, ETFs, and stocks, it’s still crucial that you choose a stable insurance company. Since the insurer is responsible for paying your income, going with a highly rated reputable company is a good idea.

Taxation

Depending on the tax qualification of funds, an immediate annuity can spread out your tax burden throughout the duration of the annuity.

If your annuity was purchased with non-qualified money (money that's already been taxed), there is a "taxable portion" of each annuity payment. The part that is taxable is your interest, while the non-taxable part is return of premium. It's important to note that when you get your premium back in full, the entire annuity payment becomes taxable.

There are strategies that utilize this favorable tax treatment to spread out the taxation of earnings in deferred accumulation annuities, such as multi-year guarantee annuities or fixed index annuities.

While this can be a great benefit to you, every tax situation is unique. You should meet with a qualified tax professional to determine if an immediate annuity will benefit your taxes. In addition to this, qualified funds receive no additional tax benefit from immediate annuities.

No Management Stress

Buying an immediate annuity means securing a guaranteed income stream — simple as that.

You do not have to manage holdings like stocks, bonds or mutual funds, which can be a major source of stress for some people. There are also no annual fees with an immediate annuity; instead your agent gets paid a one-time commission from the insurance company.

With an immediate annuity, most people just make sure that the right amount of taxes are being withheld (if any), and that their beneficiaries are up-to-date (if applicable).

The Cons:

Lack of Liquidity

While your immediate annuity contract guarantees you income, it typically does not allow you to access your principal. This is the tradeoff you make for guaranteed income.

This means you won't have access to your money in case of an emergency. For this reason, it's important not to put too much of your money into an annuity. Remember, you may need a lump sum of money at some point.

However, some insurers have introduced liquidity features for immediate annuities that allow limited access to your premium under certain terms. While it's nice to have these options, these features are costly and it is far better to plan for the unexpected by keeping sufficient emergency funds outside of your annuity.

Limited Growth Potential

While it is a huge benefit that your immediate annuity payments don't decrease with market downturns, they also don't increase with market upswings.

If you purchase an immediate annuity thinking of it as a growth vehicle, you may be disappointed. It is really longevity insurance, helping to ensure you don't outlive your money.

If you live a long time, you can make a good amount of money, but if you buy an annuity with no guarantees and die early, you could lose money. The only way to guarantee earnings is to purchase an annuity with guaranteed minimum payments, such as a term certain or refund certain option.

No or Limited Inflation Protection

If you don’t choose an annuity with inflation adjustments, you have no inflation protection. That means your payment’s purchasing power will decrease over time.

If you choose to buy an inflation protected annuity, with something like a Cost of Living Adjustment (COLA), your initial payments are lowered to account for the anticipated increases. This means you may have to live a long time for the COLA to really pay off.

You Can’t Change Your Mind Later

Once you buy an immediate annuity you have a limited amount of time to cancel your annuity contract. This free cancellation period is called the "Free Look Period". It varies by state but is typically 10-30 days.

If you don’t cancel the contract during this period, you can’t change your mind later on. This means you shouldn’t rush into buying an immediate annuity. Take your time, maybe ease into the purchase with an annuity ladder (which has other benefits as well!), and make sure your annuity is right for you.

The Gray Area:

Required Minimum Distributions (RMDs)

If you use qualified funds to purchase your annuity, it can satisfy its own Required Minimum Distributions (RMDs). This can help simplify your RMD calculations and ensure you don't miss taking them on the money in the annuity.

In addition to this, if your annuity is paying more than you would need to take as an RMD, you may be able to use the excess to satisfy other RMDs under the SECURE Act 2.0 rules. However, this is a complex topic and you should consult with a tax professional to see how it applies to your specific situation.

Just remember, even though your annuity satisfies its own RMDs, you still need to take RMDs on any other qualified funds you have outside of the annuity.

What Do You Think?

Buying an immediate annuity is a personal decision which is based on your individual finances, objectives, and how involved you want to be in your retirement investing.

For some people, talking through whether an immediate annuity makes sense helps navigate the decision. If you have any questions or just want to talk about annuities, call our experts at (866) 866-1999. We promise to give you honest answers to your questions without any sales pitch. We're here to help.