Annuities can seem like a safe way to secure guaranteed income for retirement, offering predictability and protection. But often when you dive into the fine print of the contract, you will find high fees, complex structures, and investment restrictions that are quietly destroying your long-term returns, sometimes costing you thousands of dollars annually without you even realizing it.
If you already own an annuity, or are considering buying one, it’s worth taking a closer look. In some cases, a better solution may be available.
What Exactly Is an Annuity?
An annuity is an insurance contract that converts a lump sum of money into a stream of income, either right away or at some point in the future. People often use annuities to supplement Social Security or pension income during retirement.
There are several different types:
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Fixed Annuities: Pay a guaranteed interest rate or a fixed income stream. These are often used for conservative investors seeking predictable returns.
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Variable Annuities: Your returns (and income) fluctuate based on the performance of investment options, usually mutual funds.
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Indexed Annuities: Offer returns tied to the performance of a market index (like the S&P 500), but often come with limits on upside potential and confusing formulas.
Each type has its pros and cons, but the real issue usually isn’t the structure. It’s the cost.
The Fee Problem Most Annuity Owners Don’t See
Most people don’t realize that traditional annuities often come with several layers of fees, such as:
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Mortality & Expense Risk Charges (M&E fees): These are the insurance company’s built-in costs. I’ve seen these as high as 1.75% annually.
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Investment Management Fees: The underlying funds (usually mutual funds) can charge another 0.5%–1.5% per year.
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Rider Fees: Many annuities offer optional benefits like guaranteed income or increased death benefits, but these also add cost.
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Surrender Charges: If you withdraw before your surrender period is over, you may be hit with steep penalties.
In total, it’s not uncommon for someone in a traditional variable annuity to be paying 2-3% annually in fees. On a $250,000 contract, that could be $7,500 a year, every year, eating away at your returns.
A Smarter Option: Fee-Based Annuities
The good news? The annuity landscape has changed dramatically over the past few years.
Today, there are fee-based annuities that eliminate commissions, reduce unnecessary riders, and give you access to low-cost investments. I’ve started helping clients transition out of expensive legacy annuities and into modern solutions that offer:
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Lower fees (sometimes cutting costs in half or more)
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No surrender charges
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Access to diversified, low-cost funds
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Transparent pricing and integration with your broader financial plan
We do this using a 1035 exchange, a tax-free rollover that allows you to move from one annuity to another, without creating a taxable event.
When Should You Keep the Annuity You Already Have?
Despite the fee issues, not all annuities are bad. In fact, some may still be worth keeping.
You might want to hold onto your annuity if:
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Your annuity has low fees and favorable terms
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You also value the protection it provides and aren’t focused on market growth
But even in these cases, it’s worth having your contract reviewed. There may be ways to improve your investment options or reduce risk, even without replacing the annuity entirely.
When It Might Be Time to Review or Replace
If any of these apply to you, it may be worth exploring a better option:
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You bought your annuity more than 5 years ago
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You’re paying high fees but aren’t sure what you’re getting for them
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You don’t fully understand how your annuity works or how it fits into your overall plan
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You want to consolidate and simplify your retirement accounts
In many of these cases, a 1035 exchange into a lower-cost, more transparent annuity can help you get back on track without starting over.
Frequently Asked Questions
Can I switch to a better annuity without paying penalties?
It depends. Many contracts have surrender periods, but if you’re past that window (or close), you may be able to move without any penalties. I can help you review the terms.
Are all annuities expensive?
Not anymore. Modern, fee-based annuities are often far more cost-effective, especially when managed by an advisor who acts in your best interest.
Will I lose my guaranteed income if I switch?
Not necessarily. It depends on your current contract. We’ll evaluate what guarantees you have and whether they can be replicated or even improved through a better product.
Final Thoughts
Annuities can be a helpful part of a retirement plan, but only if the costs, structure, and benefits are aligned with your goals. If you’re not sure whether your current annuity is working for you, or if you’ve been pitched an annuity and want a second opinion, we’re happy to help.
Many clients have been surprised to learn they could cut their fees, improve their investment options, and gain more control, all without triggering taxes.
If you already have an annuity and want a second opinion, or you’re curious about fee-based options, feel free to reach out for a consultation.
– Clint Kraft
Founder and Financial Advisor, Kraft Capital