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Many annuities sound like great moneymakers, but there are often hidden fees that can cut into any profits the annuity pays out, so buyers beware.
Commissions: For starters, most annuities are sold by insurance brokers or other sales people who collect a commission that can be steep – as much as 10% or so. To get around this, look at “direct sold” annuities from large brokerage firms such as Fidelity, Vanguard, and TIAA-CREF.
Surrender charges: If you opt to pull your money out of an annuity within the first several years after you buy it, you’ll pay dearly. Surrender charge typically runs about 7% of your account value if you leave after one year, and the fee generally declines by one percentage point a year until it gets to zero after year seven or eight. Note that some annuities come with even heftier surrender charges – up to 20% in the first year.
High annual fees: If you invest in a variable annuity you’ll also encounter high annual expenses. You will have an annual insurance charge that can run 1.25% or more; annual investment management fees, which range anywhere from 0.5% to more than 2%; and fees for various insurance riders, which can add another 0.6% or more.
Add them up, and you could be paying 2% to 3% a year, if not more. That could take a huge bite out of your retirement nest egg, and in some cases even cancel out some of the benefits of an annuity. Compare that to a regular mutual fund that charges an average of 1.5% a year, or index funds that charge less than 0.50% a year.
Also, as with a 401(k) or IRA, in an annuity it’s generally not a good idea to take out any money until you reach age 59 ½ because withdrawals made prior to that are hit with a 10% early withdrawal penalty.