It is often said in physics and chemistry classes and textbooks that atoms must be unstable when the electron continuously loses energy and finally fall into the nucleus according to classical physics.
The usual model of hydrogen atom in EM theory has some assumptions: the "electron" (lighter negative charge) orbits the "proton" (much heavier positive charge). The electron experiences force from the proton and from itself (self-force), but there are no other external forces; in particular, there isn't any background radiation acting on these charged particles. Also, it is assumed energy in the system flows according to the usual interpretation of the Poynting theorem.
In this model, the negative charge actually gains kinetic energy as it falls down to the nucleus. But during this fall, electric potential energy of the system (positive charge + negative charge) decreases more. So as a whole, energy of the system decreases, and this energy gets away with EM radiation. After some short time, it becomes zero and if the process continues, decreases further to negative values. Due to relation between energy and mass in relativistic theory $E=mc^2$, the system comes to a state where it has zero mass, and then negative mass.
The "atom must be unstable" means this electron fall to the nucleus happens in a very short time, around nanoseconds. We have never detected this with hydrogen atom.
They often give an impression that the two when combined would annihilate into energy.
Strictly within the ambit of classical physics, does it predict the annihilation of atom into energy? Protons and electrons are not matter and anti-matter they why should they get annihilated when the latter falls into the former?
They do not annihilate in the sense of matter+antimatter particles disappearing and EM radiation appearing, like with quantum model of positronium. In the above classical model of hydrogen, the particles just get arbitrarily closer to each other, and radiate arbitrarily large amount of EM energy.