As with other saving and financial planning products, there are fees with annuities. What are they and what do they provide?
Most types of savings and investing products have fees of one sort or another, from service charges on checking accounts to investment fees and expenses on retirement savings. Annuities, too, have fees and charges that vary based on several factors, including the annuity type.
In general, most fixed and income annuities have costs built into the product, while some may charge additional fees outside of the original product. In addition, optional riders typically come with fees, too. What can you expect for common annuity fees? Here’s an explainer.
Do all annuities have the same types of fees?
No, and the specific fees your annuity may have depend on a range of factors, including riders you may purchase. In general:
- Variable annuities have administrative fees, surrender charges, mortality expenses, investment fees, rider fees, rate spreads, and annual fees.
- Registered index-linked annuities may have the variable annuity fees listed above, including surrender chargers and rider fees.
- Fixed annuities and fixed index annuities have surrender charges and may have optional rider fees, as well as the variable annuity fees listed above.
- Immediate annuities may have optional rider fees as well as the variable annuity fees listed.
Fee names and explanations
Surrender fee
After your annuity purchase, there’s a period of time where you will be charged a penalty if you make a withdrawal. That period varies—it may be as few as one year or as many as 14—and will likely ladder down with each successive year. In addition, if you withdraw the funds before age 59½, you may also pay a 10% IRS penalty.
Some annuities provide a free withdrawal period every contract year, allowing you to withdraw a smaller percentage without paying a surrender fee. Others may allow early withdrawals in certain instances such as disability, terminal illness, or confinement to a heath care facility; your financial professional can help explain the details.
Commission fees
Financial professionals are paid a commission when they sell you an annuity contract. But the commission is built into the price of the annuity contract and you won’t be charged additionally for a commission. The commission percentage varies, and may not be applicable to every type of annuity.
Fee-based annuity
Instead of a commission, some annuities are fee-based, meaning the financial professional receives an ongoing percent of the account value—often a percent or two.
Administrative fees
These costs, typically yearly charges, cover accounting, record keeping, and other necessary maintenance of your annuity. These may be charged as a flat fee or a percentage—typically about 0.15%—of the total annuity value.
Mortality expense fees/mortality and expense risk charge
This annual fee—usually 0.5-1.5% of your annuity value—ensures that, should you die, your heirs receive the annuity value as a benefit.
Investment options fees
The underlying investments have fees for fund management and administration, called an investment fees. If your annuity is linked to an index, you may also pay fees.
Rider fees
Riders are add-ons that you purchase for your annuity; a common example is a guaranteed income rider. Riders come with additional annual costs, typically from 0.25-1.00% of the annuity’s value.
Miscellaneous fees
Some fees are more complex, and typically only occur after specific events. For example, if you cancel an annuity early, you are charged a one-time contingent deferred sales charge. If you incur a surrender charge, you may also be charged a market value adjustment provision. Rate spreads are subtracted from earnings on interest-earning annuities.
For a full list of the possible fees for an annuity, review the products prospectus or talk to your financial professional.
What’s next?
No one has exactly the same retirement goals—but an annuity may make sense for many people. What type might work best for your planning needs, now and in retirement? Review the annuity basics of different types to get started.
