Annuities allow investors to get tax-deferred growth without having to put money in an account -- such as an individual retirement account -- that the Internal Revenue Service limits. They can also generate stable income for a long period. However, annuities charge significant fees for this service. Annuities are subject to multiple fees, and investors need to understand the fees they will have to pay and use them as a basis for comparing different products.
Annuities frequently don't have an upfront sales fee, so a $1 million investment buys a $1 million annuity. However, this is a bit misleading, because annuities are subject to potentially onerous penalties if you pull money, beyond a predetermined capped maximum withdrawal, from them before a preset date. These surrender charges can be sizeable.
Mortality and Expense Fees
Many annuities have an insurance component to them. If they pay an income stream for the remainder of your life, the insurance company is taking the risk that you live to 110 instead of 75 or 85. As a form of compensation, many annuities will have an annual mortality and expense risk charge. According to the Securities and Exchange Commission, these fees are typically around 1.25 percent per year on variable annuities. Sometimes, the fee is used as a sales commission for the company that sold you the product in the first place.
Some annuities come with guarantees or other insurance-related products. For instance, if you buy a variable annuity, you could end up paying a rider fee to get a guaranteed minimum return. Other features include additional benefits at death or even long-term care insurance, all of which can carry additional costs that come in the form of rider fees.
Investment Management and Administrative Fees
Your annuity provider can also charge recurring fees for managing your annuity account. These fees can vary greatly from account to account. The SEC gives the example of an account with a flat fee of $25 or $30 per year or a 0.15 percent fee. An article in the "Wall Street Journal" cited an annuity with a 1.4 percent fee, and CBS MoneyWatch has identified one with a 2.75 percent fee. In addition to paying these fees, investors who purchase fee-bearing investments inside their annuities will also have to pay those fees.
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