Annuities are sold as a way to turn a lump sum into guaranteed lifetime income, and for some retirees that predictability is genuinely useful.
But the pitch rarely leads with the fine print: the fees layered into many contracts can shave a meaningful slice off your returns year after year.
Understanding what you're actually paying is the difference between a tool that works and one that quietly underperforms.
The most common charge is the mortality and expense risk fee, often shortened to M&E.
It typically runs around 1% to 1.25% of your account value annually on variable annuities, and it pays the insurer for the guarantees baked into the contract.
Stacked with everything else, it adds up fast.
Then come administrative fees, which cover record-keeping and paperwork, usually a flat annual charge or a small percentage.
Fund management fees are separate and can run from 0.5% to over 2%, depending on the underlying investments you choose.
If you add a living benefit rider for guaranteed income, expect another 0.5% to 1.5% per year on top.
Put it together and a variable annuity with a few riders can carry total annual costs north of 3%.
That's the number to focus on, not any single line item.
Over a 20-year retirement, paying 3% instead of 0.5% can leave a six-figure gap in what you keep, even if the underlying investments perform identically.
Surrender charges are a different animal and catch people off guard.
If you want out of a contract in the early years, the insurer may take 7% of your withdrawal in year one, sliding down to 1% by year seven or so.
That lock-in period is why annuities are illiquid, and why you should never fund one with money you might need for an emergency.
Fixed and immediate annuities are simpler.
They often have no explicit ongoing fee because the insurer builds its costs into the payout rate it quotes you.
That doesn't mean they're free, just that the cost is invisible.
Comparing the payout you're offered against what a similar immediate annuity pays elsewhere is the only way to judge whether the deal is fair.
Ask for the total annual cost in writing, including every rider, before signing anything.
Compare that number against a low-cost index fund portfolio, which might cost 0.05% to 0.20%.
And check whether a no-load or fee-based annuity, sold by a fiduciary advisor rather than a commission-based agent, offers the same guarantees for less.
If you already own an annuity, pull out the prospectus and find the fee table.
It's usually buried in the first few pages.
Add up the percentages and see what you're really paying.
If the total is above 2% and you're past the surrender period, it may be worth pricing out alternatives.
The bottom line: annuities aren't inherently bad, but the fee structure can quietly turn a reasonable idea into an expensive one.
Final Thoughts
Read the fee table before the sales pitch, not after.