Annuities have a reputation problem that has nothing to do with the pitch.
The sales story is simple: hand over a lump sum, get a guaranteed paycheck for life.
What often gets buried in the fine print is how many separate fees can stack up between you and that check.
Unlike a plain index fund that might charge 0.03% to 0.10% a year, a variable annuity can carry a web of charges that together run 2% to 4% annually, according to industry fee trackers.
On a $250,000 balance, that's $5,000 to $10,000 vanishing every year, before the market even moves.
The first layer is the mortality and expense charge, usually 0.5% to 1.5%.
It pays the insurer for the guaranteed death benefit and its profit margin.
Then come the fund expenses inside the subaccounts, which look a lot like regular mutual fund fees but often run higher.
Add a rider, like a guaranteed income or long-term care benefit, and you can tack on another 0.5% to 1.5%.
The sneakiest fees are the ones you trigger by moving your own money.
Surrender charges commonly start around 7% and slide down over five to ten years.
Many contracts also charge transfer fees if you shift between investment options more than a set number of times per year, and some impose a market value adjustment that can shrink your payout if you cash out while rates have risen.
Fixed and immediate annuities are simpler.
A fixed annuity might pay you a set rate with no explicit annual fee, because the insurer builds its cut into the rate it offers.
Immediate annuities work similarly: you hand over a sum, you get a monthly payment, and the cost is baked into the math rather than billed line by line.
Why it matters now: annuity sales hit record levels in recent years as retirees chased higher payout rates.
Insurers have also rolled out registered index-linked annuities, which carry caps and buffers instead of a simple fee schedule, making comparison shopping genuinely difficult.
Before signing anything, ask for the fee table in writing and add up every percentage.
Then ask a blunt question: what would this same money earn in a low-cost index fund or a plain Treasury ladder?
Sometimes the guarantee is worth the drag.
One more move worth making: check whether your employer's 401(k) already offers an annuity option, or whether a fee-only fiduciary advisor will review a contract you already own.
Some existing annuities can be exchanged for cheaper ones, though that triggers its own tax and surrender rules.
Our take: annuities aren't scams, but the fee stacking is real and it compounds against you for decades.
Final Thoughts
If a salesperson can't explain every charge in plain English on one page, that silence is your answer.