I’m sure you’ve heard of high-end stores that have no price-tags on their merchandise. Their motto is, “If you have to ask, you can’t afford it.” The same motto should probably be applied to annuities. The fact is that they are very rarely a good deal for anyone. The only exceptions are people who are so wealthy that their decision in unlikely to affect their lifestyle one way or the other.

Annuities are investment vehicles sold by insurance companies. They come in a number of different varieties which are based on different investment schemes. What they all seem to have in common, though, is the tendency for sub-par returns and high fees. Of course, along with the high fees come high sales commissions. Thus, annuities are among the most over-hyped investment vehicles in the marketplace. Sales agents will talk up their benefits until they are blue in the face. Rarely do they explain all the fine print, however.

Don’t Believe the Hype

Take variable annuities, for example. They are typically tied to the performance of a stock index. Many have guarantees against loss, so that you will never lose money no matter what the market does. It sounds enticing, but take care. Although contract terms vary greatly, they invariably have provisions capping the return you can receive in any given year, shaving points off the actual index performance, excluding dividend payments, etc. the net result is that these contracts by and large underperform simple index investing over time, even with their downside risk protection. And the substantial fees charged eat even further into your returns.

No Good For Retirees, Either

Many retirees see annuities as a good way to generate steady income from their retirement savings. Their simplicity is certainly appealing. But again, over all, this is a poor choice for most, even those in retirement. In nearly all cases, you can generate a superior return with similar levels of safety in other conservative investments.

The Rare Exception

The one aspect of annuities that can make them decent investments for a few people is that many of them are tax-deferred. Thus if you are one of the few people who has maxed out all tax-deferred investment vehicles available to you (and there are more options out there than you probably think), and still have excess cash that you can afford to have tied up for the long term, and are willing to earn an inferior return in exchange for tax deferral, some variety of annuity might make sense. Even then you should think carefully. If you are a ways off from retirement, and your tax bracket will likely be higher then than it is now, it may not be worth it to get tax deferral now, when your tax rate is lower. Many will be better off taking the tax hit up front, but achieving a better return in the long run.

In sum, you can’t go too far wrong by avoiding annuities entirely. If you’re one of the very few people for whom they might make sense in limited cases, chances are your finances will be in fine shape either way.