Annuities vs. Managed Accounts
Annuities and managed investment accounts can both play important roles in retirement planning, but they are fundamentally different structures. An annuity is an insurance contract. A managed account is generally an investment account in which securities are managed according to an investment strategy. Understanding the differences in liquidity, risk, fees, taxation, downside exposure and income features can help investors determine how each may fit within a broader retirement strategy.
The fundamental difference
Annuity
An annuity is a contract issued by an insurance company.
Depending on the type of annuity, it may provide tax deferral, guaranteed income options, principal guarantees, defined downside protection or market-linked growth potential.
Guarantees are subject to the claims-paying ability of the issuing insurance company.
Managed Account
A managed investment account generally owns securities such as stocks, bonds, ETFs, mutual funds or other investments.
An investment professional or portfolio manager may manage the account according to an agreed investment strategy.
Account values fluctuate with the investments held and are generally not protected from market losses by an insurance company.
Side-by-side comparison
| Consideration | Annuity | Managed Investment Account |
|---|---|---|
| Structure | Insurance contract | Investment account holding securities |
| Liquidity | May be limited by surrender periods, withdrawal provisions or contract adjustments | Generally greater liquidity, depending on investments held |
| Market participation | Depends on annuity type and crediting method | Generally direct through securities owned |
| Market losses | Depends on contract; some provide guarantees or defined downside protection while others permit significant losses | Account value can decline directly with investment performance |
| Income guarantees | May be available depending on contract | Withdrawals can be structured, but generally are not insurance guarantees |
| Annual advisory fee | Generally not a base-contract charge on many commission-based annuities; contract-specific fees may still apply | Commonly charged in investment advisory relationships |
| Surrender charge | May apply during the surrender period | Generally no annuity surrender charge |
| Tax deferral | Nonqualified annuity earnings generally grow tax deferred | Tax treatment depends on account type and securities held |
| Capital gains treatment | Taxable nonqualified annuity earnings generally are ordinary income when distributed | Certain investments may qualify for long-term capital-gains treatment |
| Tax-loss harvesting | Generally not available in the same manner | May be available in taxable accounts |
| Customization | Determined primarily by available contract features and allocations | Can often be customized extensively |
| Insurance-company guarantee | Certain contractual guarantees may apply | Generally none on market investment performance |
Fees: the comparison requires more than one number
Comparing annuity costs with managed-account costs can be misleading if the comparison looks only at an advertised annual percentage.
Managed accounts
Many investment advisory relationships charge an ongoing fee based on the amount of assets being managed.
Additional costs may include underlying fund or ETF expenses, transaction expenses, custody expenses or other charges depending on the arrangement.
Annuities
Annuity expenses vary significantly by product.
Some fixed indexed annuities may have no explicit annual base-contract fee.
However, that does not mean the contract has no economic costs or restrictions.
Potential considerations may include:
- Surrender charges
- Optional rider charges
- Market Value Adjustments
- Caps
- Participation rates
- Spreads
- Other crediting limitations
Read the detailed Annuity Fees & Costs Guide .
Liquidity
Liquidity is one of the most important differences between these structures.
Managed accounts
Securities in many managed accounts can generally be sold and converted to cash relatively quickly, although market conditions, settlement periods, taxes and investment-specific restrictions may affect access.
Annuities
Deferred annuities are generally designed as long-term financial products.
Contracts may include surrender periods and limits on withdrawals that can be made without a surrender charge.
For investors who expect to need substantial short-term access to their money, liquidity deserves particular attention before purchasing an annuity.
Market risk and downside protection
A traditional managed investment account generally participates directly in the gains and losses of the investments it holds.
A diversified portfolio may help manage risk, but diversification does not eliminate the possibility of loss.
Annuity risk varies dramatically by type.
Fixed Annuity
Generally provides contractual interest and principal guarantees, subject to contract terms and the claims-paying ability of the insurer.
Fixed Indexed Annuity
Generally provides principal protection from direct index-market losses while interest-crediting potential is tied to an index formula.
RILA
Can provide defined downside protection such as a buffer or floor, while the investor remains exposed to losses beyond the applicable protection.
Variable Annuity
Account value generally fluctuates with the performance of selected investment options and may experience substantial losses.
Growth potential
A managed portfolio can potentially participate fully in the upside and downside of the securities it owns.
An indexed annuity may trade some of that unrestricted upside participation for contractual protection or other insurance features.
The tradeoff matters
A cap or participation rate should not automatically be viewed as bad, nor should downside protection automatically be viewed as good.
They are parts of an economic tradeoff.
The appropriate structure depends on what the investor is trying to accomplish with that portion of the portfolio.
Retirement income
Managed investments can be used to fund systematic retirement withdrawals.
However, the sustainability of those withdrawals depends on factors including investment returns, withdrawal rates, inflation, longevity and the sequence in which market returns occur.
Certain annuities can provide contractual lifetime-income features.
These guarantees may be valuable for investors seeking to transfer a portion of longevity or income risk to an insurance company.
Guarantees remain subject to the financial strength and claims-paying ability of the issuing insurer.
Tax differences
Tax treatment can significantly affect the comparison.
Nonqualified annuity
Earnings generally grow tax deferred while they remain inside the contract.
Taxable gains distributed from the contract are generally taxed as ordinary income.
Taxable managed account
Interest, dividends and realized capital gains may create current taxable income.
However, qualifying long-term capital gains may receive different federal tax treatment than ordinary income, and taxable portfolios may provide opportunities for tax-loss harvesting.
For more detail, read How Are Annuities Taxed? .
What about compensation?
Compensation structures can differ significantly.
Managed accounts
Investment advisers frequently charge an ongoing advisory fee based on assets under management, although other pricing structures may be used.
Annuities
Some annuities are sold through commission-based arrangements in which compensation is paid by the issuing or distributing company rather than appearing as an annual advisory deduction from contract value.
Fee-based and advisory annuity structures also exist.
Potential advantages of managed accounts
- Generally greater liquidity
- Direct ownership of securities
- Broad portfolio customization
- Potential long-term capital-gains treatment in taxable accounts
- Potential tax-loss harvesting
- No annuity surrender schedule
- Ability to change investment strategy over time
- Potentially greater upside participation
Potential advantages of annuities
- Tax-deferred growth for nonqualified contracts
- Potential lifetime-income features
- Potential contractual downside protection
- Potential principal guarantees on certain products
- Ability to transfer selected risks to an insurer
- Some fixed indexed annuities may have no explicit annual base-contract fee
- Death-benefit or other insurance features may be available
Availability and terms differ materially among contracts.
Potential disadvantages of managed accounts
- Exposure to market losses
- Ongoing advisory fees may apply
- Underlying investment expenses may apply
- No insurance-company guarantee of investment performance
- Retirement withdrawals may be affected by sequence-of-returns risk
- Income typically is not contractually guaranteed for life
Potential disadvantages of annuities
- Liquidity restrictions
- Surrender charges may apply
- Products can be complex
- Caps or participation rates may limit credited upside
- Optional rider fees may apply
- Taxable gains generally receive ordinary-income treatment
- Guarantees depend on the insurer's claims-paying ability
- Some annuity types expose investors to market losses
The hybrid approach
Retirement planning does not necessarily require choosing only one structure.
Some investors may use a combination of managed investments and insurance products for different purposes.
One portion of retirement assets might remain in liquid, diversified investments intended for long-term growth and flexibility.
Another portion might be allocated to an annuity intended to address a specific income, principal-protection or downside-risk objective.
This is only an example of portfolio construction — not a recommendation or allocation formula.
The appropriate allocation, if any, depends on the investor's age, retirement income, pension, risk tolerance, liquidity needs, tax situation, time horizon and other financial resources.
Special considerations for firefighters and first responders
Retiring firefighters and other public employees often have financial circumstances that differ from those of many private-sector retirees.
Their retirement resources may include:
- Pension income
- DROP proceeds
- Governmental 457(b) assets
- IRA assets
- Roth accounts
- Taxable investments
- Social Security
- Other retirement savings
A pension may already provide a significant source of lifetime income.
That can affect how much additional guaranteed income, market exposure, liquidity or downside protection a retiree actually needs.
The entire retirement-income picture should therefore be considered before deciding whether assets belong in an annuity, managed account or a combination of strategies.
Questions to ask before deciding
- How much money must remain liquid?
- How much guaranteed income already comes from a pension?
- What level of market loss can the investor tolerate?
- Is lifetime income an important objective?
- What are the total fees and expenses?
- Does the annuity have a surrender period?
- What withdrawal provisions apply?
- What are the tax consequences?
- How is the financial professional compensated?
- What alternatives were considered?
- What happens if financial needs change?
- How does the strategy affect beneficiaries and estate planning?
Frequently asked questions
Are annuities better than managed accounts?
Neither structure is universally better. They address different risks and objectives.
Are managed accounts more liquid?
In many cases, yes. Managed securities accounts generally do not have annuity surrender schedules, although individual investments may have their own liquidity limitations.
Can an annuity have no annual fee?
Some fixed indexed annuities may have no explicit annual base-contract fee. Other charges, surrender provisions or economic tradeoffs can still apply.
Do managed accounts protect against market losses?
A portfolio can be constructed to manage risk, but ordinary market investments generally do not provide the contractual downside guarantees available with certain insurance products.
Can someone use both?
Yes. Depending on individual circumstances, different portions of a retirement portfolio may be used for liquidity, growth, income or protection objectives.
This material is provided for general educational and informational purposes only. It is not intended as individualized investment, insurance, tax or legal advice or as a recommendation to purchase or sell any particular investment or insurance product.
Annuity contracts and investment advisory arrangements vary substantially. Fees, expenses, surrender provisions, withdrawal features, guarantees, investment options and taxation depend on the specific product, account structure and individual circumstances.
Insurance guarantees are subject to the claims-paying ability of the issuing insurance company.
Investing in securities involves risk, including possible loss of principal.