We talked a whole lot about the benefits and advantages of annuities, but like any investment it’s not all fun and games and sunshine. There are some disadvantages of annuities as well. Even though annuities sound like the prime investment to make if you want to secure an easy retirement, the truth is a little more complicated.
There are some hidden fees associated with annuities. So don’t be surprised when you cash out and you notice your payments are exactly what you expected. Do your research before hand.
Before you buy an annuity, know about the following fees that can cut into your bottom line with you begin to collect payments. Withdrawing is as complicated as choosing the investment in the first place.
Types of Fees in Annuities
One of the most obvious fees that can be associated with your annuity is a finder’s fee, or a commission, meaning the insurance broker who sells you and manages the account for you can charge you a very steep fee, possibly up to ten percent. That’s quite a bit of your earnings.
There are also what are called surrender charges, meaning that if you withdraw from your annuity early, you will pay a penalty of some amount, depending on how early you are cashing out. If you make it past a year, then you may be talking about around eight percent after taxes. But if you take your payment before the first year goes by, you could be looking at as much as a twenty percent penalty fee. This fee percentage will slowly decline year after year, so the best thing to do is put it your money in and leave it until the annuity has matured fully.
The last of the most obvious fees you may not realize are there is the annual fee just for having the annuity. There are insurance charges that can hit you for one and a quarter percent, then management fees that can range from half of a percent to up to around two percent, and even some insurance riders, which can run another half of a percent.
All in all here we are talking up to another three to five percent payment just in annual fees. If you aren’t smart about choosing the right annuity, you could even ultimately end up canceling out any benefit you would have received. You’d have done just as well to get a savings account, if not better. If you are going to not do the proper research and learn before hand, you might as well just go get a mutual fund or index fund and call it a day.
Annuity Disadvantages Can Cost You!
These are not all of the hidden fees you may encounter when dealing with annuities. Some even have a ten percent penalty for withdrawing before the age of sixty. Make sure you are doing your research to avoid these disadvantages of annuities. One way to get around this is to by what is called a direct-sold annuity. It is called this because there is no insurance agent go-between to take a commission. Look into those as well.