Annuities are pitched as a simple way to turn savings into guaranteed lifetime income, and for some retirees that predictability is genuinely valuable.
But the fees baked into many contracts are anything but simple, and they can shave thousands of dollars off the money that actually reaches your pocket.
Understanding what you're paying is the difference between a fair deal and an expensive one.
Start with the commission, which is often the biggest single cost and the hardest to see.
A salesperson selling a variable or indexed annuity can earn anywhere from 4% to 8% of your premium upfront, and that money comes out of your account before it ever has a chance to grow.
You won't find a line item labeled "commission" on your statement, but it's there, priced into the product.
Variable annuities frequently stack a mortality and expense fee, fund management fees, and optional rider fees for things like a guaranteed income benefit.
Add them together and you can be looking at 2% to 3% or more per year.
On a $250,000 contract, that's $5,000 to $7,500 annually, year after year, regardless of how your investments perform.
If you want out during the early years, typically the first five to seven, you'll pay a percentage of your account value that starts high and steps down over time.
That structure is exactly why so many buyers feel trapped after realizing the fees are steeper than they expected.
Fixed indexed annuities have their own quirks.
They often advertise a participation rate or a cap on how much of the index's gain you'll receive, and the insurer keeps the difference.
There's usually no explicit annual fee, but the trade-off shows up in limited upside rather than a visible charge.
The good news is that not all annuities are expensive.
Low-cost immediate annuities, sometimes called income annuities, can have fees under 1%, and some straightforward fixed products carry no explicit ongoing charges at all.
Shopping several quotes and asking directly for the fee breakdown in writing is the single best move you can make before signing anything.
Before you commit, ask three questions: What's the total annual cost including every rider?
And how does this compare to simply holding low-cost index funds and withdrawing slowly?
If a salesperson dodges those questions, that's your answer.
One more thing worth knowing: some annuities sold through employers or online brokers now come with far lower fees than the traditional commissioned versions.
The gap between the most and least expensive contracts can be enormous, and it rarely has anything to do with how good the product is for you.
Our take: annuities can make sense for retirees who truly want guaranteed income and will actually use it, but the fee drag on many contracts is real and often underestimated.
Final Thoughts
Treat any pitch that skips past the costs as a warning sign, and get every number in writing before you hand over a dollar.