Annuities

Why are annuity fees so high?

Many annuities sound like great moneymakers, but there are often hidden fees that can cut into any profits the annuity pays out, so buyers beware.

Commissions: For starters, most annuities are sold by insurance brokers or other sales people who collect a commission that can be steep – as much as 10% or so. To get around this, look at “direct sold” annuities from large brokerage firms such as Fidelity, Vanguard, and TIAA-CREF.

Surrender charges: If you opt to pull your money out of an annuity within the first several years after you buy it, you’ll pay dearly. Surrender charge typically runs about 7% of your account value if you leave after one year, and the fee generally declines by one percentage point a year until it gets to zero after year seven or eight. Note that some annuities come with even heftier surrender charges – up to 20% in the first year.

High annual fees: If you invest in a variable annuity you’ll also encounter high annual expenses. You will have an annual insurance charge that can run 1.25% or more; annual investment management fees, which range anywhere from 0.5% to more than 2%; and fees for various insurance riders, which can add another 0.6% or more.

Add them up, and you could be paying 2% to 3% a year, if not more. That could take a huge bite out of your retirement nest egg, and in some cases even cancel out some of the benefits of an annuity. Compare that to a regular mutual fund that charges an average of 1.5% a year, or index funds that charge less than 0.50% a year.

Also, as with a 401(k) or IRA, in an annuity it’s generally not a good idea to take out any money until you reach age 59 ½ because withdrawals made prior to that are hit with a 10% early withdrawal penalty.

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