Income predictability is a priority for many US expats approaching retirement, which is why purchasing a retirement annuity has become an appealing solution.
By converting a portion of your retirement savings into a contractually defined income stream backed by the claims-paying ability of the issuing insurer, annuities can provide stability and simplify budgeting in later stages of life.
However, annuitisation is a decision with lasting consequences, some of which may be unfavourable without adequate planning. This article explains how retirement annuities work and highlights the key considerations US expats should evaluate before committing.
What You Will Learn
- What an annuity is and how it works
- Why purchasing an annuity may be appealing to US expats nearing retirement
- What the key disadvantages and trade-offs of annuities are
- What considerations US expats should evaluate before purchasing an annuity
What Is an Annuity for Retirement?
A retirement annuity is a contract with an insurance company that converts a lump sum (or a series of premiums) into a regular income stream. Depending on the product, payments may last for the remainder of your life or for a fixed term.
Annuities are commonly structured in one of two ways:
| Annuity Type | Overview |
|---|---|
| Immediate annuity | Typically funded with a single premium (lump sum), with payments commencing shortly thereafter, usually within 12 months |
| Deferred annuity | Payments commence at a future date, allowing the value to grow (or be credited) during the deferral period |
What Are the Benefits of a Retirement Annuity?
The primary advantage of a retirement annuity is income stability. Once you determine the monthly or annual income required to meet essential living costs, you can purchase an annuity structured to provide a predictable stream of payments to support that need, subject to the claims-paying ability of the issuing insurer.
Consequently, annuities are particularly advantageous for retirees who prioritise certainty over maximum growth potential. They may also be suitable for individuals with relatively predictable retirement spending or other assets that can remain invested for growth while the annuity covers baseline costs.
Additional benefits of retirement annuities include:
- Tax-deferred growth: Annuity values may grow on a tax-deferred basis during the accumulation phase. Tax is generally payable when you start making withdrawals, and earnings are typically taxed as ordinary income. For US taxpayers, the precise treatment depends on whether the annuity is held within a qualified retirement account or purchased with after-tax funds.
- Reduced ongoing management: Once purchased, an annuity requires minimal day-to-day involvement. Investment activities and administration are typically managed by the insurer, allowing you to receive an income stream without actively monitoring markets.
- Customisability: An annuity can be tailored to your financial objectives through optional features such as death benefits, joint-life income, or guaranteed payout periods, which enable beneficiaries to continue receiving payments after your passing, although additional features typically increase overall contract costs.
- Flexible funding parameters: Unlike certain workplace retirement plans, such as a traditional 401(k), non-qualified annuities are not subject to annual IRS contribution limits. However, annuities held within qualified retirement accounts remain subject to applicable contribution limits and required minimum distribution (RMD) rules. Such flexibility may appeal to US expats who have already maximised other tax-advantaged contributions and are seeking a supplemental retirement savings vehicle.
What Are the Risks and Disadvantages of Purchasing an Annuity for Retirement?
The most commonly cited drawback of annuities is their reduced liquidity. Depending on the contract, you may either be unable to access the original principal once an annuity is annuitised or be able to do so only upon paying substantial surrender charges for early or excess withdrawals.
Other potential limitations include:
- Contractual complexity: While managing an annuity after purchase is relatively simple, annuity contracts typically include extensive legal and financial jargon that may require professional assistance to navigate.
- Insurer credit risk: In the US, there is no federal guarantee scheme comparable to deposit insurance. Protections against the insurer’s credit risk are provided by state-level guaranty associations and are subject to limits and conditions, which vary by state and apply only if the insurer is licensed in that state. For this reason, evaluating the insurer’s financial strength and contract protections is essential.
- Reduced return potential: In exchange for income guarantees, annuities often deliver moderate returns. Long-term outcomes may be subpar compared to those of a diversified investment portfolio, particularly for investors with sufficient time horizon, liquidity, and risk tolerance.
If you wish to mitigate these risks and determine whether an annuity fits within your broader retirement plan, you may benefit from professional guidance.
Our advisers at Titan Wealth International can assess product suitability, costs, liquidity terms, and issuer strength to develop a retirement income strategy that effectively integrates annuities and aligns with your long-term financial objectives.
What Is the Best Type of Annuity for Retirement?
The most suitable retirement annuity type depends primarily on your retirement objectives and other income sources. Upon reviewing these factors, you may select between three general annuity types:
- Fixed annuities
- Fixed indexed annuities
- Variable annuities
Fixed Annuities
A fixed annuity provides a contractually specified interest rate during the accumulation phase and can deliver a predictable income stream during retirement, subject to the claims-paying ability of the issuing insurer.
For instance, the contract may credit a fixed annual interest rate of 3% on your premium for a specified period, providing clarity on how the annuity value will grow.
The level of income you receive is typically based on factors such as:
- The contract value (the amount invested and the credited interest).
- Your age at the beginning of the payout phase.
- The payout structure (e.g., fixed-period vs. lifetime payments).
Fixed annuities are typically favoured by more conservative retirees who prioritise capital preservation and income certainty over maximising growth. Because the insurer guarantees the credited rate, payments are generally insulated from day-to-day market volatility, although they remain dependent on the insurer’s financial strength.
The primary limitation of fixed annuities is inflation risk. Payments from this type of annuity are typically level, meaning purchasing power may erode over time as the cost of living increases.
You may address inflation risk by purchasing annuities with inflation-linked or escalating payments. Such options increase income over time, either by a fixed percentage or through an inflation measure such as the CPI, though these features generally reduce the initial income level available at purchase.
Fixed Indexed Annuities
A fixed indexed annuity (FIA) credits interest based on the performance of a referenced market index (such as the S&P 500), while limiting both gains and losses through predefined contract terms. FIAs are insurance products and do not involve direct investment in the underlying index.
The insurer typically guarantees a floor (e.g., 0% or a low fixed rate), so that negative index performance does not reduce the annuity’s principal, provided withdrawals remain within contractual limits. In exchange for downside protection, the annuity credits interest only up to certain limits and under specific formulas. Rather than receiving the full index return, the insurer usually applies mechanisms, such as a participation rate and/or a rate cap, to limit the index gains.
This combination of principal protection and limited market participation can make fixed indexed annuities particularly suitable for retirees who:
- Wish to receive a predictable income.
- Are willing to forgo a certain portion of gains.
- Prefer continued market-linked growth potential with limited volatility risk.
The most prominent challenge related to fixed indexed annuities is complexity. It is essential to properly understand the mechanism of interest crediting, including:
- Return caps.
- Participation rates.
- Spreads or margins.
Variable Annuities
Variable annuities allow you to allocate your premium among a selection of subaccounts, which function similarly to mutual funds and may invest in assets such as:
- Equities
- Bonds
- Specialty or sector-focused strategies
Because returns are tied to the performance of the underlying investments, the value of the annuity will fluctuate with market conditions. While this offers greater growth potential than fixed annuities, it also introduces a higher downside risk.
Some contracts include guaranteed features (often offered through optional riders) that can provide a minimal level of income or principal protection, helping reduce market risk, though these guarantees are subject to additional fees and the insurer’s claims-paying ability.
Because they resemble traditional investments, variable annuities appeal to those who want higher growth potential than a fixed annuity can offer and are willing to assume the associated risk.
However, variable annuities are typically more expensive and complex than other annuity types. Costs can include various ongoing fees, such as:
- Administrative fees
- Fund management fees
- Mortality charges
- Surrender charges for early withdrawals
- Rider fees
Variable annuities are securities regulated under US federal securities laws and are typically sold by representatives who are appropriately licensed.
Need Advice on Annuities as a US Expat?
How Do Annuities for Retirement Compare to Drawdown Options?
In contrast to an annuity, a pension drawdown approach enables you to withdraw income from your retirement savings as needed rather than receiving a fixed, contractually defined payment stream.
For US expats, this may involve taking distributions from IRAs, 401(k)s, or taxable investment accounts while remaining invested in market-based assets. As a result, drawdown differs from annuitisation in several key aspects:
| Aspect | Annuity | Drawdown |
|---|---|---|
| Income flexibility | Payouts are fixed and typically inflexible once established | Withdrawals may be adjusted to reflect changing spending needs and income requirements |
| Ongoing management | Generally limited once purchased; the insurer administers the payments | Requires extensive monitoring of investment performance, withdrawal amounts, and sequencing risk |
| Income guarantee | A lifetime annuity can provide contractually guaranteed income, subject to the claims-paying ability of the insurer throughout your retirement | No guaranteed lifetime income; there is a risk of depleting/outliving the fund |
| Legacy for heirs | Residual value for heirs is typically minimal, particularly with single-life annuities without guarantees | Any remaining account value may be passed on to beneficiaries, subject to applicable tax rules |
Because annuities and drawdowns serve different purposes, selecting between the two is rarely an “either/or” decision.
Many US expats adopt a combined approach; leveraging an annuity to cover essential, predictable expenses while retaining a portion of their retirement assets in drawdown to ensure flexibility, liquidity, and investment exposure.
For US taxpayers, required minimum distribution (RMD) rules may also influence how much can remain invested versus annuitised within qualified retirement accounts.
What Should US Expats Consider Before Buying an Annuity for Retirement?
As a US citizen living abroad, purchasing and structuring an annuity can involve additional regulatory and tax considerations. Product availability may depend on your country of residence, as many US insurers and financial institutions restrict new sales to non-residents.
In addition, annuity income — whether from a US or foreign insurer — remains subject to US federal taxation. While tax treaties may influence how income is taxed in your country of residence, they generally do not eliminate US worldwide taxation for American citizens.
Because you may also be taxed in your country of residence, cross-border annuity income can create potential double taxation exposure. Tax treaties often allocate taxing rights or reduce withholding taxes, but the United States typically retains the right to tax its citizens on worldwide income under the treaty “savings clause.”
In practice, double taxation is frequently mitigated through unilateral mechanisms such as foreign tax credits. However, the outcome depends on the specific treaty, the classification of the annuity under local law, and the tax rules of your country of residence.
For these reasons, US expats should carefully assess product access, tax treatment, reporting obligations, and cross-border implications before proceeding.
Qualified vs Non-Qualified Annuities
If an annuity is held within a traditional IRA or employer-sponsored retirement plan (such as a 401(k)), distributions are generally taxed as ordinary income. Required Minimum Distributions (RMDs) generally apply to these accounts beginning at age 73 under current law.
Non-qualified annuities, those purchased with after-tax funds, follow different tax rules. Withdrawals are generally taxed on a last-in, first-out (LIFO) basis, meaning earnings are taxed first as ordinary income.
If the contract is annuitised, payments are typically taxed under the exclusion ratio rules, which allow a portion of each payment to be treated as a non-taxable return of principal.
Withdrawals taken before age 59½ may also be subject to a 10% additional tax unless an exception applies.
Understanding this distinction is particularly important for US expats, as local-country tax treatment may differ from US treatment.
Required Minimum Distributions (RMDs) and QLAC Considerations
If you hold annuities within traditional IRAs or employer retirement plans, you must generally begin taking Required Minimum Distributions at age 73.
Certain annuities structured as Qualified Longevity Annuity Contracts (QLACs) may allow you to defer RMDs on the portion of assets used to purchase the contract, up to the applicable IRS dollar limit, which is indexed periodically for inflation.
This can be useful for retirees seeking to manage taxable income later in life while securing contractually guaranteed lifetime income, subject to the insurer’s claims-paying ability, starting at an advanced age.
However, QLAC rules are technical, and the deferral applies only to the allocated premium amount rather than the entire retirement account.
Foreign Annuities and US Reporting Obligations
US expats are often approached with local-country or “international” annuity products. While these may appear attractive, their US tax and reporting treatment can be complex.
Depending on the structure, a non-US annuity may:
- Be reportable under FBAR (FinCEN Form 114)
- Be reportable under FATCA (Form 8938)
- Be classified as a Passive Foreign Investment Company (PFIC), which may require separate annual reporting and specialised tax treatment
- In certain cases, raise additional foreign trust reporting considerations
Adverse US tax treatment can significantly reduce the intended benefit of the product. For this reason, specialist US cross-border tax advice is essential before purchasing any non-US-issued annuity.
Licensing and Cross-Border Restrictions
Many US insurers and broker-dealers restrict new annuity sales to individuals residing outside the United States. In addition, financial professionals must be appropriately licensed to advise US citizens abroad, and cross-border solicitation rules may limit the availability of certain products.
As a result, your country of residence may materially affect which annuity solutions are accessible and how they can be structured.
Currency Risk and Location Considerations
For US expats retiring abroad, currency exposure is a critical but often overlooked factor.
If your annuity income is denominated in US dollars but your living expenses are in another currency, exchange rate fluctuations may affect your real purchasing power over time. A strengthening local currency could effectively reduce your income in local terms, while long-term currency volatility may introduce uncertainty into what is intended to be a stable income source.
When evaluating annuities, it is important to consider not only income stability but also the currency in which that income will be paid.
Inflation Risk and Real Income Sustainability
While annuities can provide predictable income, the long-term sustainability of that income depends on how it keeps pace with inflation.
Many fixed annuities provide level payments that do not increase over time. Although this structure may offer higher initial income, its purchasing power can erode over a retirement that may last 20 to 30 years or longer. For US expats, this risk may be amplified if living expenses are rising in a foreign currency or if local inflation differs from US inflation trends.
Some annuities offer inflation-linked or escalating payment options. These may increase annually by a fixed percentage or be linked to an inflation index such as the Consumer Price Index (CPI). While such features can help preserve purchasing power, they typically result in lower initial income compared to level-payment alternatives.
When evaluating an annuity, US expats should assess not only the starting income amount, but how that income may perform in real (inflation-adjusted) terms over the course of retirement.
Fees, Charges, and Liquidity Constraints
Annuities are long-term contracts, and their cost structure can materially affect overall outcomes.
Depending on the product type, charges may include:
- Administrative fees
- Mortality and expense (M&E) risk charges
- Underlying fund management fees (for variable annuities)
- Rider fees for optional guarantees
- Surrender charges for early withdrawals
Surrender periods commonly extend several years, and withdrawing more than the permitted amount during this period may trigger penalties. For US expats, liquidity considerations are particularly important, as relocating, healthcare needs, or changes in residency status may require access to capital.
In fixed indexed annuities, returns may be limited through participation rates, caps, or spreads. While these features provide downside protection against market losses, they also constrain upside potential.
Before committing to an annuity, US expats should ensure they understand the full cost structure, liquidity restrictions, and how those factors align with their broader financial plan.
Interaction With Social Security Benefits
For many US expats, Social Security forms part of their retirement income strategy. Annuity income may increase your provisional income for US tax purposes, which can affect how much of your Social Security benefit is subject to federal taxation.
When determining how much guaranteed income to secure through annuitisation, it is advisable to consider the combined impact on your overall taxable income.
Estate Planning and Legacy Considerations
Annuitisation decisions are often irreversible. Once a lump sum is converted into a lifetime income stream, access to capital may be limited or eliminated.
US expats should carefully evaluate:
- Whether to structure the annuity as single-life or joint-life
- Whether to include guaranteed payment periods
- The potential impact on heirs
- How the annuity fits within their broader estate planning strategy
Because US citizens remain subject to US estate tax on worldwide assets, subject to applicable exemption thresholds and prevailing law at the time of death, coordination between retirement income planning and estate planning is particularly important.
When Should a US Expat Consider an Annuity in Retirement?
Annuities are not universally suitable, but they may serve a defined role within a broader retirement income strategy. For US expats approaching retirement, an annuity may be appropriate where:
- Essential living expenses are not fully covered by Social Security or other contractually guaranteed income sources.
- Longevity risk is a primary concern.
- There is a preference for predictable income over market-based variability.
- Sufficient liquid assets remain outside the annuity.
- The income currency aligns with expected retirement spending needs.
- The annuity’s tax treatment and reporting obligations have been assessed in light of the individual’s country of residence.
On the other hand, annuities may be less appropriate for US expats where:
- Liquidity and capital flexibility are a priority.
- Passing assets efficiently to heirs is a primary objective.
- The retiree has a high tolerance for market risk and seeks long-term growth.
- Retirement income needs are uncertain or expected to fluctuate materially.
- The product structure introduces complex cross-border tax or reporting exposure.
For many US expats, annuities are most effective when used selectively, covering core, non-discretionary expenses while retaining flexibility and growth potential in other assets, and the overall suitability of the product within the retiree’s financial plan.
Complimentary US Expat Retirement Annuity Consultation
Selecting an annuity as a US expat involves more than choosing a payout level. US tax treatment, reporting obligations, cross-border regulation, currency exposure, and long-term liquidity all influence whether an annuity structure genuinely strengthens your retirement plan.
In a complimentary introductory consultation with Titan Wealth International, you will:
- Review how qualified and non-qualified annuities may fit within your existing retirement accounts and cross-border tax position.
- Understand how US reporting requirements, treaty considerations, and currency exposure could affect long-term outcomes.
- See how Titan Wealth International can help you evaluate whether annuitisation aligns with your retirement income objectives and overall financial strategy.
Key Takeaway
A retirement annuity can be a valuable source of dependable income, subject to the claims-paying ability of the issuing insurer, but it should be purchased only with a clear understanding of the contract terms and in alignment with your broader retirement plan.
Without careful planning, you may assume unnecessary illiquidity, incur unintended tax or reporting consequences, or purchase a product that does not complement your other assets and income sources.
To avoid such scenarios and navigate the cross-border considerations US expats face when purchasing an annuity, you can contact Titan Wealth International.
Our financial advisers will assist you in determining whether an annuity is appropriate for your circumstances and help identify a solution that aligns with your retirement objectives, subject to a full assessment of suitability, tax implications, and regulatory considerations.
The information provided in this article is not a substitute for personalised financial, tax or legal advice. You should obtain financial advice and tax advice tailored to your particular circumstances and in respect of any jurisdictions where you may have tax or other liabilities. Titan Wealth International accepts no liability for any direct or indirect loss arising from the use of, or reliance on, this information, nor for any errors or omissions in the content.
