A Thing or Two About Annuity Fees
Annuities like any other financial investment vehicle are covered by fees and charges. Annuity fees may actually be quite higher compared to other investments. The fees, though, are dependent on the special features of the annuities. If you opt for the most favorable and most flexible annuity options, brace yourself as these come at a price in terms of additional fees and charges.
A fee or two may be incorporated into your annuity-building expenses.
First there are mortality and expense (M&E) charges. They cover insurance guarantees, administrative and operational expenses, sales commissions, the management charges. These are usually charged in basis points where they are computed as percentage of the investment value. Usually forming part of the determination of the interest and annuity payment amounts, M&E charges are basic fees in annuities.
Then there are surrender charges which are more like pre-termination fees charged if the annuity is cashed or terminated before the pre-set time of payout. The charge may decline depending on the proximity of the time of surrender to the time of maturity or payout. The overriding consideration why surrender charges are levied is to discourage investors from making short-term investments. If the investment is supposed to fund retirement at future dates, it pays to ensure that the funds are maintained to optimize yield until retirement. Pre-terminating greatly diminishes the earning potential of the annuity. Issuers will sometimes give considerations on pre-term or surrender provided that the withdrawal is not very sizeable, maybe less than 10% of the investment within a given year.
Take heed of management fees also. Annuities are sometimes assessed for management fees especially variable annuities where monitoring and management are intensive. Management fees are like those charged or levied on mutual funds for investment management purposes. Your investment manager or issuer spends a considerable amount of time and resources in managing your investments for you so much so that these kinds of fees will have to be imputed on the transactions.
These fees and charges are levied on annuities for the account of the investor to encourage long-term investment; because the longer the term, the higher the probability of recouping the costs through guaranteed returns of investments. In the short-term, returns will not be enough to cover the generally high costs or charges (when compared to other investment instruments' charges).
Experts agree that the term will be a primary determinant in the costing of other fees and charges. The longer the term, the more spread out the total costs will be and chances are, the charges will be lower. Higher guaranteed returns will tend to compensate also for the charges and fees levied. Annuity issuers also consider the tax angle as the projected taxes will have to be imputed and in the overall deducted from the total charges if only to somehow ensure that the best returns are generated for the investor.
With these charges, you need to check out the fine prints and disclosure statements, and clarify them with your issuer if you have any concerns as to applicability of the charges levied.