Why is liquidity a concern with annuities?

Liquidity is a concern with annuities primarily because funds are often locked in for a specific period. This means that once an individual invests in an annuity, they may not have immediate access to those funds without incurring penalties. Annuities typically have surrender periods, where withdrawing funds before the end of this period can result in significant charges, reducing the amount of money the investor receives.

The locking-in of funds can create difficulties if the investor encounters an unexpected financial need, as they might not be able to access their money without facing hefty penalties or losing a portion of their investment. This aspect of annuities is crucial for investors to consider, as it impacts their overall financial flexibility and ability to respond to changing circumstances. In contrast, while there may be tax implications or specific investment options that can affect liquidity, those factors do not address the core issue of being unable to access funds readily without penalty.