Annuities

What fees and charges are associated with annuities?

Annuities have fees and charges that make them costlier than many other investments:

Mortality and Expense (M & E) Risk Charge
This is a fee charged by the insurance company. It is intended to compensate for the risks the company assumes when providing the annuity.
Annual Account Charges
These miscellaneous charges can include administrative and record-keeping fees.
Investment Management Fees
In a variable annuity, each of the sub-accounts is managed by a professional investment firm, usually a mutual fund firm, which charges a management fee. This comes out of your account value.
Surrender Charges
These are fees imposed by the insurance company if you need to take money out of the annuity before you've owned the annuity for a certain length of time, generally seven to 10 years. Often these are sliding fees, say 10% of your investment the first year, reducing by 1% each year until it reaches zero.
Sales Charges
Annuities are generally sold by commissioned sales people. If there's not a separate sales charge, it may be built into the other fees. More

Fees for Special Features
Many annuities allow you to select special features such as a death benefit, minimum income guarantees, beneficiary protection, extra withdrawal privileges and so forth, for which you pay an extra fee.
Tax Penalty for Early Withdrawal
Deferred annuities are intended to be long-term retirement savings vehicles. That's why the government lets the earnings grow tax-deferred. So, with certain exceptions, if you take money out before age 59-1/2, you'll be hit with a 10% tax penalty, in addition to having to pay ordinary income tax on the gains.