If you have money at a bank, credit union, and/or investment firm, it is likely that you’re paying some type of fee – even if it is not readily noticeable. For instance, many stocks and mutual funds charge up-front commissions when you buy and/or sell. This, in turn, can end up reducing your overall return – as can annual advisory management fees.
Likewise, if you don’t maintain a minimum account balance at some establishments, you could also incur charges or fees, and over a period of time, these could really start to add up! One financial vehicle that is known for its long list of fees is the variable annuity.
While some investors like having the opportunity for tax-advantaged growth and market-like returns, there are other things to consider before purchasing a variable annuity – including the long list of fees. Otherwise, your actual return could be disappointing.
Common Variable Annuity Fees to Look Out For
Although not all annuities – and not even all variable annuities – are the same, many will have similarities. This includes the fees that are taken out of your variable annuity. Some of the most common fees that you can find with variable annuities include the following:
- Annual Administrative Charge / Contract Fee
- Broker Commission – Many variable annuities will deduct an up-front commission to pay the broker or financial advisor who sold the annuity to you. Sometimes this fee can be in the 5% range, or higher. Because of this, you could start out with a “loss” from the very beginning.
- M&E (Mortality and Expense) Fee – Annuities are insurance products, and because of that they offer various guarantees. Therefore, the insurance company must “hedge” its risk somehow – and the mortality and expense fee is one way that they do so. Generally, the amount of this fee is somewhere between 0.50% to 2% of the account value each year.
- Investment / Investment Management Charges – Variable annuities gauge their return by the performance of one or more underlying investments, such as mutual funds. These funds have managers that are compensated, regardless of how large or small the return is. This annual fee can also reduce the amount of actual return you get from a variable annuity.
- Additional Riders – Oftentimes, there are riders that may be added to a variable annuity contract, such as income guarantees and/or an enhanced death benefit. Although these features are sometimes included at no additional charge, they are more likely to cost you a certain amount of additional premium every year.
- Surrender Penalties – Many annuities and other insurance products will have a surrender period during which time, if the policy or annuity is canceled (i.e., surrendered), there may be an early withdrawal fee. (This is also the case if you withdraw more than a certain amount – such as 10% – in any given year during the surrender period). Typically, the percentage of the surrender charge will decrease over time, until it eventually goes to 0%).
In addition to fees that are directly attributable to a variable annuity itself, you may also find yourself handing over money to the IRS in the form of taxes and/or an early withdrawal fee. For instance, if any of the money you withdraw has not yet been subject to taxation, it will be taxed at your then-current income tax rate for the year of the withdrawal.
Plus, if you make withdrawals from a variable annuity before you are age 59 ½, there could be an additional 10% penalty for early withdrawal from the IRS. Given all of the potential fees you could face with a variable annuity, it may make sense to look at other financial vehicles – such as fixed or fixed indexed annuities – that may pay a lower rate of return, but also have low or no fees.
Is a Variable Annuity Right for You?
While variable annuities can provide some enticing features – such as the opportunity for a large return – they will also oftentimes cost you. So, it is important to weigh out the comparison between the “potential” for gain (but also the risk of loss) with variable annuities versus the far less risky – but steady positive return – on fixed and fixed indexed annuities.
If you still have questions about variable annuity fees and/or whether or not any type of annuity is right for you, Annuity Gator can help. We are a team of annuity and retirement income planning specialists. So, feel free to reach out to us by phone at (888) 440-2468 or email us through our secure online contact form and schedule a no-cost, no-obligation chat with an annuity specialist.