Salespeople love to talk about the income an annuity can generate.
They rarely lead with the fees that come out of your account first.
According to industry data, the average variable annuity carries total annual costs of roughly 2% to 3% once you add up every layer — and that drag compounds for decades.
Here's the part that surprises most people: annuities don't have one fee.
They have several, and each one gets skimmed separately.
Start with mortality and expense charges, usually 1% to 1.25% a year.
That covers the insurer's guarantees and profit.
Then come administrative fees, often $30 to $50 annually, plus fund management fees inside the subaccounts, which run another 0.5% to 1%.
Stack on optional riders — income guarantees, death benefits, long-term care — and you can add 0.5% to 1.5% each.
A single income rider can push your total cost past 3% a year.
On a $250,000 account, that's $7,500 gone annually before your money even tries to grow.
Surrender charges are the fee that traps people.
If you want out early, insurers typically charge 7% in year one, sliding down by a point each year until it hits zero around year seven or eight.
That means a $100,000 annuity could cost you $7,000 just to walk away in the first year.
Fixed indexed annuities play a different game.
They often skip the explicit annual fee but cap your upside instead.
Your index might gain 20%, but the contract limits you to 5% or 6% — the rest goes to the insurer.
Some also use participation rates or spreads that quietly reduce your credited interest.
Fixed annuities and multi-year guaranteed annuities (MYGAs) are usually the cheapest.
Many charge no explicit annual fees at all because the insurer makes its money on the spread between what it earns and what it pays you.
Immediate annuities, where you hand over a lump sum for lifetime income, are also generally fee-light.
The cost is baked into the payout rate, so compare quotes from several insurers before signing.
Before 2024, many buyers never saw total costs in one place.
New SEC and state rules have pushed better disclosure, but you still have to ask.
Request the fee table in writing and add up every line yourself.
If you already own an annuity inside a tax-advantaged account like an IRA, that's a red flag.
You're paying for tax deferral you already have.
Surrendering may still make sense even with the charge, depending on your break-even math.
Before you buy anything, ask three questions: What's the total annual cost including all riders?
If a salesperson dodges those, walk away.
Our take: annuities can make sense for a narrow slice of people who want guaranteed lifetime income and have maxed out cheaper options.
For most Americans, the fee drag is too heavy a price to pay for a guarantee you might not need.
Final Thoughts
Get the numbers in writing, compare against a simple index fund, and let the math decide.