Annuities are sold as a way to turn a lump sum into a guaranteed paycheck for life.
What the brochures tend to skip is how much of your money never makes it into that paycheck.
The fees come in several layers, and they can quietly shave tens of thousands of dollars off what you eventually collect.
When you buy a variable or indexed annuity through an agent, that seller is typically paid upfront — often 4% to 8% of what you invest.
That cost isn't billed to you separately.
It's baked into the product, which is one reason the surrender period can stretch seven years or longer.
Variable annuities commonly carry mortality and expense fees of around 1% to 1.5% a year, plus fund management fees, plus an annual contract charge of $30 to $50.
Add a living-benefit rider and you can tack on another 0.5% to 1.5%.
Stack it all up and you're looking at 2% to 3% annually — before the market does anything.
A 2.5% annual drag on a $100,000 annuity costs about $2,500 in year one, and it compounds against you every year after.
Over a couple of decades, the gap between a 3% return and a 5.5% return is the difference between a comfortable retirement and a tight one.
Fixed and immediate annuities are simpler, but not free.
There's no annual expense ratio, yet the payout rate quoted to you already reflects the insurer's cut.
If a competitor offers a noticeably higher monthly check for the same premium, the difference is usually in what each company is keeping.
Indexed annuities are the hardest to compare.
The caps, participation rates, and spreads that limit your gains are not fees in the traditional sense, but they do the same job — they keep more of the upside for the insurance company.
Many also charge rider fees and surrender charges that decline slowly over a decade.
Ask for the fee disclosure page in writing before you sign anything, and read the surrender schedule line by line.
Compare the total annual cost against a plain index fund, which might run 0.03% to 0.10%.
If the annuity's main appeal is tax deferral, remember that a 401(k) or IRA already gives you that for free.
If you already own one, check whether you're past the surrender period.
Once those charges expire, you have leverage — you can often move to a lower-cost provider or drop riders you're not using.
Some older contracts even have valuable guarantees worth keeping, so run the numbers before you surrender anything.
Our take: annuities aren't automatically bad, but the fee structure rewards the people selling them more than the people buying them.
Final Thoughts
Treat any pitch that doesn't lead with a clear, written fee breakdown as a reason to walk away.