Types of Annuity Products for US Expats: Pros, Cons, and Features Explained

There are several types of annuities, and the most suitable option depends on your financial circumstances, retirement goals, tax position, and residency status.

This article examines the various types of annuity products available to expats, focusing on their key features, benefits, and drawbacks. It also explores methods for integrating annuities into a US-expat-focused retirement planning strategy and highlights limitations that are particularly relevant for individuals living outside their home country before making an investment.

What Is an Annuity Investment?

An annuity is a contract with an insurance company that offers regular and predictable payments in exchange for a premium. Annuities can be funded through a single lump sum or a series of premiums, and they may be structured to provide income either immediately or at a future date.

With certain types of annuities, the insurer places your premium into the annuity’s investment account, allowing your balance to earn interest during the accumulation period.

For US tax purposes, US-issued annuities generally allow tax-deferred growth, meaning earnings are taxed only when withdrawn. This treatment does not automatically apply to non-US issued or offshore annuity contracts.

Some annuities do not impose contribution limits, and the insurer may provide a death benefit or refund feature that pays out some or all of the remaining contract value to your beneficiaries.

However, the death benefit feature is not automatic and depends on the annuity type, payout option selected, and whether optional riders are added when purchasing an annuity.

Most types of annuities include a surrender period—an interval of 3–10 years during which withdrawals above permitted amounts may trigger surrender charges, which vary depending on the contract year in which you access the funds. Withdrawals made in early years may incur higher charges than those made toward the end of the surrender period.

Additionally, taxable earnings derived from annuities in the US are generally subject to a 10% early withdrawal penalty under IRC §72(q) if accessed before age 59½, unless a statutory exception applies (such as lifetime annuitisation or substantially equal periodic payments). Foreign residency alone does not exempt the penalty.

What Are the Two Types of Annuities Based on Access Timing?

Depending on when the payments are due to commence, annuities are classified as immediate or deferred. The table below outlines their key differences:

With immediate annuities, you exchange a lump sum for a payment stream that may last for a lifetime or a fixed period, with payments commonly made monthly or annually. Once annuitised, the decision is generally irreversible and implies a loss of access to the underlying capital.

With deferred annuities, your future payouts depend on the contract’s accumulated value and the payout option selected when you start receiving income.

For US expats, the accumulation phase may be subject to local taxation depending on the rules in their country of residence, even if no withdrawals are taken.

What Are the Different Types of Annuities Available to US Expats?

As a US expat, the 3 main types of annuities you may consider are:

1. Fixed annuities
2. Variable annuities
3. Indexed annuities

Fixed Annuities

A fixed annuity credits a rate of return guaranteed by the issuing insurance company and can be used to generate a predictable income stream.

Unlike market-linked annuities, a fixed annuity’s credited interest is not directly tied to stock market performance. Instead, the insurer typically invests the premium in conservative assets, such as corporate bonds and securities. For US tax purposes, earnings generally grow on a tax-deferred basis until amounts are withdrawn or converted into taxable income.

As the contract owner, you can choose when to begin receiving income and whether payments should be made for a fixed period or for the duration of your life.

The insurance company determines the payment amount based on factors such as:

• Your age.
• The contract value.
• Selected payout structure.
• Prevailing pricing and interest rates at the time payments commence.

Pros and Cons of Fixed Annuities

Due to the guaranteed interest rate and protection from market volatility, fixed annuities are particularly beneficial for risk-averse investors seeking a reliable source of retirement income.

Although modest, the returns are guaranteed, and the payments are stable and predictable subject to the insurer’s claims-paying ability.

However, investing in fixed annuities also includes several potential drawbacks, the most notable being:

• Low growth potential: As the return rate is fixed, these annuities typically underperform compared to other long-term investments, offering limited potential for growth.
• Inflation risk: An annuity with a fixed return rate does not automatically adjust with inflation, so the purchasing power of fixed annuity payouts may decline over time.

Variable Annuities

Unlike fixed annuities, variable annuities allocate premiums to sub-accounts that are similar to mutual funds. Consequently, the contract’s account value (and sometimes the income ultimately available) can increase or decrease based on the performance of the underlying investments.

The table below outlines the primary differences between a variable annuity vs. a fixed annuity:

Pros and Cons of Variable Annuities

Variable annuities offer advantages for individuals seeking exposure to market-driven growth, as their return potential increases during periods of positive market performance.

Meanwhile, the main drawbacks of variable annuities, particularly in comparison to fixed annuities, include:

• High fees.
• No guarantee of investment returns.
• Complex management.

However, variable annuities also offer riders, allowing you to address specific policy limitations. For instance, you may add a living benefit rider that provides a guaranteed income level based on a separate benefit base, subject to withdrawal limits and rider conditions, even during market downturns.

Indexed Annuities

An indexed annuity, often referred to as a fixed indexed annuity, is a form of fixed insurance contract that credits interest based on the performance of a specific market index, such as the S&P 500, while typically applying a floor (often 0%) that limits credited losses from index performance, subject to contract terms, fees, and inflation.

However, the amount credited is commonly restricted through mechanisms such as:

1. Participation rate: Determines the percentage of index gains that are credited to the contract. For instance, with a participation rate of 80%, a 15% index increase could result in a 12% interest credit before applying any additional limits.
2. Rate cap: A maximum credited rate for the period. For instance, if the policy’s rate cap is 4%, the credited interest cannot exceed 4%, regardless of the index performance and participation rate.

Pros and Cons of Indexed Annuities

Indexed annuities may appeal to investors seeking to balance income stability and the potential for US tax-deferred growth. They can provide a structured income stream in retirement and typically offer some protection against market downturns through index-crediting floors.

However, indexed annuities may be less suitable for investors focused on maximising long-term growth at the lowest possible cost. The earning potential of indexed annuities is commonly constrained by caps, participation rates, or spreads, and overall costs can increase, particularly when optional riders, surrender charges, or other contract fees apply.

Common Pitfalls for US Expats Using Annuities

While annuities can play a useful role in retirement income planning, US expats face several risks that are less common for US residents living domestically.

Understanding these challenges is essential before committing to a long-term insurance contract that may be difficult or costly to exit.

Key pitfalls to be aware of include:

• Unfavourable foreign tax treatment: Some countries do not recognise the US tax-deferred treatment of annuities and may tax investment growth annually, even if no withdrawals are taken.
• Restricted access to providers: Many US insurance companies limit annuity sales and ongoing servicing to US residents of specific states, which can complicate policy management after relocating abroad.
• Liquidity constraints: Most annuities impose surrender periods during which withdrawals above permitted thresholds trigger surrender charges. This can be problematic for expats who require flexibility due to changing residency, healthcare needs, or unexpected relocation costs.
• Misunderstanding of guarantees: Income guarantees and minimum return features are backed by the issuing insurer and do not protect against inflation, currency movements, or changes in tax law.
• Cross-border reporting complexity: Non-US issued or offshore annuities can trigger complex US tax treatment, including loss of tax deferral, current income inclusion, and additional reporting (e.g. FBAR, FATCA). In some cases, they may be treated as foreign trusts or non-compliant insurance contracts.

Careful product selection and jurisdiction-aware planning are therefore essential for US expats considering annuities as part of a retirement income strategy.

Annuities vs Drawdown for US Expats

When planning retirement income, US expats are not limited to annuities. An alternative approach is a drawdown strategy, where investments remain invested and income is withdrawn as needed without converting capital into a guaranteed income contract.

The table below highlights the key differences between annuities and drawdown strategies from a US expat perspective:

For many US expats, a hybrid approach may be appropriate. This involves using annuities to cover essential living expenses while maintaining a drawdown portfolio to provide flexibility, inflation protection, and discretionary spending capacity.

The optimal balance depends on expected retirement length, health considerations, residency plans, and tolerance for income variability.

How To Integrate Annuities Into Cross-Border Retirement Planning: Tax Efficient Strategies

US expats often consider annuities as one component of a broader retirement income strategy, supplementing payments from sources such as:

1. 401(k) or IRA
2. Social Security
3. Foreign pensions

However, annuities can also be purchased within retirement accounts, where they are subject to the distribution, required minimum distribution (RMD), and taxation rules applicable to the underlying account rather than standard annuity taxation rules.

For this reason, purchasing an annuity as a US expat requires thorough planning to ensure cross-border tax efficiency and wealth preservation.

To integrate annuities into your long-term retirement plan while protecting your investment from excessive taxation and currency erosion, it is recommended to:

1. Consider market access to annuities as a US expat
2. Understand your tax obligations
3. Implement tax optimisation strategies
4. Consider currency risks

Consider Market Access to Annuities as a US Expat

US expats attempting to acquire annuities while living abroad may face significant obstacles due to US state-level insurance regulations and insurer residency requirements.

Many US insurers restrict annuity sales or ongoing servicing to residents of certain US states due to state-level insurance licensing requirements and internal compliance policies.

As a result, applications from non-resident US citizens may be declined, or existing policies may face servicing limitations after relocation abroad.

Due to such challenges, you may need to consult a financial adviser or broker authorised to advise non-resident US clients, who collaborates with insurers specialised in servicing US citizens abroad.

Finding a suitable annuity provider as a US expat is crucial, as they will be able to offer personalised guidance on tax optimisation, currency considerations, and product availability for non-resident US citizens, which may differ from options available to US residents.

Understand Your Tax Obligations

As an American expat, your tax liability on annuity income in the US depends on whether your annuity is funded with pre-tax or after-tax premiums:

1. Qualified annuities: They are funded using pre-tax contributions and are taxed as ordinary income upon withdrawal. Qualified annuities are typically purchased through a retirement account, such as a 401(k) or IRA, and operate under the distribution and taxation rules applicable to these accounts.
2. Non-qualified annuities: They are funded with after-tax contributions, meaning only investment earnings are taxed upon withdrawal. Non-qualified annuities are purchased separately from other retirement accounts.

Regardless of your current jurisdiction of residence, your annuity income remains within the scope of US taxation if you are a US citizen or a green card holder. A clear understanding of how qualified and non-qualified annuities are taxed is therefore essential when designing a retirement income strategy that aims to minimise unnecessary tax exposure.

How Your Country of Residence Affects Annuity Taxation

Although US citizens remain subject to US tax on annuity income regardless of residence, the country in which you live can significantly affect your net retirement income.

Key factors influenced by residence include:

• Whether annuity growth is taxed annually or only on withdrawal
• Whether annuity income is classified as pension income, annuity income, or other income
• Availability of treaty relief or foreign tax credits
• Local withholding and reporting requirements

The table below illustrates how outcomes may differ depending on residency:

Because tax treaties vary significantly in how annuity income is treated, US expats should consult a specialist expat adviser and review the specific treaty articles applicable to their country of residence before purchasing or annuitising an annuity contract.

Implement Tax Optimisation Strategies

Depending on the foreign jurisdiction in which you establish tax residency, you may be subject to tax on annuity income both in your country of residence and in the US.

However, you may be able to reduce or eliminate double taxation by leveraging a double taxation agreement (DTA) between the US and your country of residence.

The US has income tax treaties with over 60 countries, including the UK, Australia, South Africa, and Spain. However, treaty treatment of annuity income varies significantly—some treaties classify annuities as pensions, others as ‘other income,’ while some provide no specific annuity relief at all.

DTAs contain provisions that grant the primary taxing right to one of the contracting jurisdictions and outline mechanisms for claiming tax relief.

In cases where no DTA applies, or where treaty relief is limited, you may apply for a Foreign Tax Credit (FTC). This tax relief mechanism allows you to claim a dollar-for-dollar credit for some or all of the taxes paid abroad on US-taxable annuity income, subject to applicable limitations.

Consulting our financial advisers at Titan Wealth International ensures you understand the tax reliefs you qualify for. Our team can help you identify appropriate tax relief mechanisms while ensuring cross-border tax compliance based on your residency status and treaty position.

Consider Currency Risks

Currency fluctuations can significantly affect the purchasing power of the income you receive from retirement annuities held in the US. If your annuity payments are denominated in US dollars but your living expenses are in another currency, each payment in local terms will fluctuate with exchange rates.

Currency risk is particularly relevant when making large conversions. Exchanging a significant amount of US dollars into a foreign currency at a single point in time may expose you to adverse rate movements, especially if the foreign currency later weakens or if the US dollar strengthens. Conversely, if the foreign currency depreciates against the US dollar, the local value of your ongoing annuity income may decline.

To manage FX timing risks, consider gradually converting smaller amounts at favourable exchange rates, maintaining a deliberate mix of currencies aligned with expected future spending and long-term residency plans.