Annuities might be an essential part of you retirement plan, so don't let these common misconceptions steer you away from what might be a fantastic option for you. Consulting with an annuity specialist is always a great idea for clearing up any confusion, to ensure that you get the most out of your annuity with full understanding under your belt.

Misconception 1: Annuities are risky and unsafe.

Truth: Since annuities are insurance products, they are backed by the financial strength and claims-paying ability of the insurance carrier. While variable and fixed-index annuities do have some risk involved, they are less risky than regular investment portfolios. If you have low risk tolerance, fixed annuities have no loss of principal due to market downturns and can be a solution that provides guaranteed credited interest and lifetime income.

It is important that you abide by the terms of the contract and your annuity specialist will make sure you are in full understanding before signing. Early withdrawals can result in loss of principal and credited interest due to what is called “surrender charges”. Also, with the purchase of additional features called “riders”, the contract’s value will be reduced by the cost of those riders, which may result in a loss of principal and interest in any year in which the contract does not earn interest or earns interest in an amount less than the rider charge.

It is unlikely that you will breach the contract or lose out on credited interest because your annuity specialist will make sure you are in full understanding of your contract and will help balance riders with benefits so that they pay off.

Misconception 2: Annuities are very complicated and difficult to understand.

Truth: Annuities have several moving parts, but as a concept, annuities are straightforward. In exchange for a payment of a premium, an insurance company will provide a series of income payments. Annuities provide financial protection against the risk of living too long and running out of money.

Misconception 3: Annuities are full of hidden charges.

Truth: Fees associated with an annuity should never be hidden and will be fully outlined in the contract. It is important to find an annuity specialist that is both knowledgeable and trustworthy and makes sure you understand each aspect to your annuity. If you should choose to add a rider to your annuity, there is often an additional charge per rider that will be outlined in your contract. Your specialist will outline any surrender charges, should you choose to withdraw money beyond what the contract allows.

Misconception 4: Fixed annuities are investments.

Truth: They are not. Fixed annuities are insurance products that have the ability to guarantee an income stream through retirement. Although they are linked to a percentage change in an external index, they do not directly participate in any stock or equity investments. If interest is credited, it is based on the crediting method chosen in association with the underlying index(es) during a certain timeframe.

Misconception 5: Annuities lock up your money so you can’t access it.

Truth: Annuities are designed to be long term investment products, but do offer a few ways for the client to access the money should something happen and you need it. It is important that you have access to other sources of liquid funds for daily expenses and emergencies, however, most annuities give a client access to at least a portion of the money each year. Some annuities may require a commitment period before money can be accessed, but you can still withdraw money if needed, although there will likely be certain fees such as a surrender charge, income tax and potential tax penalties. There is typically a charge for early withdrawal and some annuities may allow 10% or less of the account value to be withdrawn each year free of charge.

Misconception 6: Annuities are not tax efficient.

Truth: No matter the annuity you purchase, earnings will compound on a tax-deferred basis until you begin taking out money. This leaves potential to build more retirement savings than you would have been able to if some of your earnings went toward income taxes each year. While IRAs and 401(k)s also offer tax deferral, these accounts tend to have yearly caps on investment. Annuities usually have no government-imposed contribution limit.

Source: http://nafa.com/online/library/Addressing-Annuity-Misconceptions.pdf