Annuities are sold as a simple promise: hand over a lump sum, and get a check for life.
What the brochure tends to skip is how many layers of fees sit between your money and that check — and how much those layers quietly drain over decades.
The most notorious is the surrender charge.
If you try to pull your money out early, typically within the first seven years, you can owe a penalty that starts around 7% and steps down each year.
On a $100,000 annuity, that's $7,000 gone just for changing your mind.
Then come the ongoing costs, which never take a year off.
Mortality and expense charges usually run 1% to 1.5% of your account value annually.
Add administrative fees of $25 to $50 a year, plus fund management fees if you're in a variable annuity, and a rider for guaranteed income can tack on another 0.5% to 1.5%.
Stack those together and a variable annuity can easily cost 2% to 3% per year.
On a $200,000 balance, a 2.5% annual drag is $5,000 — every year, whether the market is up or down.
Many variable annuities bury their fees inside the underlying mutual funds, so you never see one clean line item.
You have to dig through the prospectus to add up what you're really paying.
The Insurance Information Institute notes that fees vary widely by product and insurer, which is exactly why comparison shopping matters.
Fixed indexed annuities play a similar game from the other direction.
They often skip explicit annual fees but cap your upside — a 6% cap means that in a year the index gains 20%, you keep 6%.
That gap is a cost, just an invisible one.
Ask for the total annual cost in dollars, not percentages.
Ask what the surrender schedule looks like year by year.
And check whether a no-load or low-cost annuity from a discount broker might cover the same need for a fraction of the price.
If an agent can't or won't put total costs in plain dollars on paper, that's your answer. **Our take:** Annuities can make sense for some retirees who want guaranteed income and have maxed out other options, but the fee stack is real and it compounds against you.
Final Thoughts
Treat any pitch that dodges the total-cost question as a red flag, and always compare against simply investing the money yourself.