TL;DR: Annuities can provide guaranteed retirement income, but hidden annuity fees often reduce returns more than investors expect.
Main points:
- The different types of annuity fees — including management, rider, and surrender charges — and how they affect your long-term returns.
- How variable annuity fees and fixed annuity “spreads” quietly cut into earnings.
- Why riders like income or death benefits can add 0.5–2% in extra costs each year.
- How surrender charges penalize early withdrawals during the first 6–10 years.
- Smart strategies to minimize annuity fees, such as comparing providers and working with fee-only advisors for transparent guidance.
Annuities promise reliable income, but what many investors miss are the hidden fees buried in the fine print. These costs can quietly erode returns and make what seems like a safe investment far less rewarding. Understanding annuity fees, rider charges, and surrender penalties helps investors make informed decisions before committing.
While annuities can play a valuable role in retirement planning, knowing the total cost of ownership is essential. Here’s what every investor should ask before buying.
The Real Cost of Annuities
Annuities are contracts with insurance companies. In exchange for your investment, you receive guaranteed income later. However, those guarantees come with built-in expenses.
Insurers profit from both the money you invest, and the fees tied to your contract. Some charges are clear, but others, such as administrative costs and rider fees, can remain hidden until you review your statement closely.
These are some common annuity fees by type:
Variable Annuity Fees
Variable annuity fees are typically higher because these products include investment options, like mutual fund subaccounts. In addition to management costs, investors pay mortality and expense (M&E) fees, which compensate insurers for guarantees. Combined, these can range from 2% to 4% annually.
Let’s say you have an investment earning 6%. It might only net 2% to 3% after fees. Always ask for a clear breakdown before investing.
Fixed Annuity Fees
Fixed annuities may look fee-free, but the insurer often earns profit by offering lower interest rates. For example, a fixed annuity paying 3% may have no stated fees, but the insurer could earn 4% or more on your premium behind the scenes. The difference, called the “spread,” is effectively the fee you pay.
Annuity Fees to Watch Out For
Not all annuities are equal, and the fee structures can vary widely. Below are the most common costs to watch for before signing any annuity contract.
Annuity Management Fees
Annuity management fees cover administrative costs, recordkeeping, and account servicing. They may seem small, often 0.10% to 0.25% of your account value, but they reduce returns every year. Over decades, that can mean thousands lost to ongoing maintenance charges.
Rider Fees
If you’ve ever wondered what a rider fee on an annuity is, think of it as the cost for extra features.
The rider fee is usually charged as a percentage of your account value each year and can range from 0.5% to 2% annually depending on the feature. Common types include:
- Income Riders: Guarantee a lifetime income stream, even if your investment balance runs out. These can help retirees manage longevity risk but may add more than 1% to annual costs.
- Death Benefit Riders: Ensure a beneficiary receives a minimum payout if you die before or after income payments begin. Helpful for estate planning, but often unnecessary if you already have life insurance.
- Inflation or Cost-of-Living Riders: Adjust payouts for inflation. Valuable for long retirements but may reduce initial income.
- Long-Term Care or Disability Riders: Offer extra income if you need nursing care or experience a disability. Premiums can be steep, and benefits vary widely by insurer.
Surrender Charges
An annuity surrender charge is a penalty for withdrawing before a specified period, often called the surrender period. The surrender period is typically within the first 6 to 10 years. Early surrender can trigger fees starting at percentage of the withdrawn amount, gradually decreasing over time.
The annuity surrender charge is one of the most misunderstood, and most expensive, fees investors face. Surrender charges exist because insurers use your investment to fund long-term guarantees. If you take your money out early, they recover those costs through penalties.
How Hidden Annuity Fees Affect Your Returns
Even modest fees can dramatically impact long-term returns. Imagine investing $100,000 in a variable annuity earning 6% annually but carrying total fees of 3%. Over 20 years, those fees could reduce your ending balance by more than $80,000 compared to a lower-cost investment.
The effect compounds quietly, year after year. The more layers of fees your annuity carries, the harder it becomes to reach your financial goals. Transparency is your best defense, always review a fee schedule before signing.
What to Look for Before Buying an Annuity
Before committing to any annuity, take time to ask clear, detailed questions. Asking these questions upfront helps you separate marketing promises from real financial value. Financial advisors who have your best interests in mind will be able to give clear answers. Here’s what you should ask your advisor about the real annuity costs:
- What are the total annual annuity fees, including management and rider charges?
- How long is the surrender period, and how does the penalty decrease over time?
- Are there additional variable annuity fees tied to investment choices?
- Are all riders necessary, or can I build similar protection elsewhere?
- What is the total annual cost, and how does it affect projected returns?
- When will the annuity’s benefits exceed its costs?
How to Avoid Unnecessary Annuity Fees
Not all annuities have expensive annuity fees. The key is knowing how to compare options and avoid unnecessary add-ons. Financial professional can help you with these steps, so you find the most suitable annuity contract for your financial needs.
Shop Around for the Most Suitable Packages
Different insurers charge different annuity management fees. Compare several providers to find one that offers transparency and lower costs. Asset Preservation only works with A-rated providers, so clients get what they need.
Reassess Your Financial Needs Regularly
Your needs can change at any time. With that in mind, you need to be updated on what works for you and what no longer serves in your best interest. Make sure the product you bought still fits your goals.
Use Fee-Only Advisors
Work with an independent, fee-only financial advisor. Unlike commission-based sellers, they are usually fiduciaries who don’t profit from selling specific annuities and can offer unbiased advice. You want to make sure you’re purchasing a financial product you’re confident in.
Get Transparent Financial Help
Annuities can offer peace of mind, but hidden fees often stand between investors and strong returns. From management costs to rider charges and surrender penalties, every dollar paid in fees is one less earning for your future.
Get your complimentary portfolio review today!
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Foundations deems reliable any statistical data or information obtained from or prepared by third party sources that is included in any commentary, but in no way guarantees its accuracy or completeness.
Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not in any way refer to investment advisory products. Rates and guarantees provided by insurance products and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.
