Basics:

Paying Taxes on Annuity Fees and Expenses

The reason many investment industry experts dislike annuities are for their high fees and expenses. Sometimes a long term gain on a tax deferred annuity can be less than long term gain on a taxable account where by each year the dividends are taxed. The reason is because at the end of your term, the gain for an annuity is taxed at ordinary income tax rates like 39.6% or more depending on the tax bracket, while the taxable dividends account is taxed at 20% or less depending on the tax bracket. So no wonder most investors like to stay clear of annuities. The two types of annuities are the fixed annuity and the variable annuity. The variable annuity carries with it higher fees and expenses because it contains more features.

Some of the fees and expenses concerning annuities are as follows:

In a variable annuity, "mortality and expense" charges are usually administrative fees to maintain your account, including commissions. They average around 1.15% of the investment each year. In a fixed annuity, these charges are part of the payouts or take form of an interest rate imposed by the insurance companies periodically.
Surrender charges occur when you cash in your annuity before a term is up. The charges depend on how long the term was and how early you pulled out. Obviously, the earlier the annuity was pulled, the higher the charges. Charges gradually phase out. Annuities are long-term investments and they should be treated that way.
Management fees are charged on variable annuities and they are close to 1% of the investment each year. They are like an investment manager's fee in a mutual fund.

So if you really want to invest in an annuity, make sure you have long term plans for it. That's the only way you won't lose on this investment.