There are many different kinds of annuities. Before taking action, you’ll want to understand how a retirement annuity works and how to choose the best retirement annuity for your circumstances. Here’s a look at what’s available on today’s market, along with the pros and cons of using annuities for retirement.

Types of Retirement Annuities

Annuities are complex insurance products with a long list of choices. “Because there are so many different annuities on the market, people often times get confused,” says Michael Hess, a wealth management advisor with WestPac Wealth Partners in Encino, California. “There isn’t a one-size-fits-all annuity.”

There are several types of annuities for retirees:

While there are many insurance products available, you’ll find several common threads among annuities. “They all offer some sort of guarantee,” says Ian Grove, an associate advisor for Robert Green & Company in Napa, California. The recurring paycheck you will receive is the biggest benefit of annuities, but you also need to watch out for costs. “They all come with some type of surrender charge,” Grove says. This means if you take out funds before an established date, you’ll face additional fees and penalties. For instance, if an annuity has a surrender period of 10 years, you’ll face penalties if you want to use the money for something else during those initial 10 years.

Benefits of a Retirement Annuity

When you purchase an annuity you shift some of the financial risks of retirement to the insurance company. “With pension plans a thing of the past and Social Security accounting for only a small part of people’s retirement income, having a guaranteed paycheck for life, no matter what the stock market does and no matter how long you live, is a great safety net to have,” Hess says.

Having this low-risk vehicle in your portfolio could also make it easier to take on risks in other areas. Some investors choose an annuity as a way to diversify their portfolio. Furthermore, the funds in an annuity are not taxed until you receive income payments.

Drawbacks of a Retirement Annuity

Expect to pay a number of charges to take out and maintain an annuity. “Broadly speaking, fees are higher than traditional investment vehicles,” says Zachary Ashburn, president of Reach Strategic Wealth in Winston-Salem, North Carolina. “Since annuities are frequently marketed with a focus on their investment characteristics, it’s important to note that these fees impact the returns the owner will receive.”

The motives for a financial professional to offer you an annuity could stem from their own personal interest. “Insurance companies that create them pay high rates of commissions to encourage salesmen to market them,” Ashburn says. There could be a financial incentive for a salesperson to suggest an annuity as a solution without taking a careful look at your situation.

It can also be challenging to select the exact type of annuity you want. For instance, “many variable annuities have optional riders that guarantee a death benefit or income payment,” says Alexander Petsis, a financial planner at Anthony Petsis & Associates in Newtown, Pennsylvania. These extra riders may seem beneficial, but they also come with additional fees.

Are Annuities a Good Investment for Retirees?

When deciding whether an annuity is a good fit for retirement, a solid starting point may be to talk to an advisor who is familiar with annuities. Take care to gauge the financial planner’s experience in the annuity industry. “It would be a good idea to ask the advisor if they personally own the annuity that they are recommending, and if not, why?” Hess says. It may be wise to get several opinions on annuities before committing to a contract.

If possible, you may want to avoid working with planners who receive a commission for themselves when selling an annuity. “Consider engaging a fee-only financial planner who does not accept commissions and therefore doesn’t have this conflict of interest in product recommendations,” Ashburn says.

One of the best ways to know if an annuity is a good fit is to create a written financial plan. “Then one can select an annuity to fulfill a certain goal within their financial plan,” Petsis says. “If that annuity does not fulfill a specific financial goal, it may not be right for you.”