Variables have several drawbacks that can erode their advantages. For starters, there’s a lot more risk associated with a variable annuity.

RISKS
If the investments you choose for your annuity decline, the value of your annuity will also decline – and that means a lower payout.

TAXES
With variable annuities, you’ll pay taxes on the annuity’s gains when you withdraw them, plus a 10% penalty if you’re under age 59.5. Variables also have another little tax issue: Any long-term capital gains you build up in stock and bond sub-accounts are taxed at ordinary income rates when you withdraw them.

FEES
Aside from surrender charges that for early withdrawals, variables can also come with deep sales commissions. Add ongoing management fees and insurance charges, which can run as high as 2% to 3% a year, and you’re looking at a hefty amount of fees cutting into your returns.

Variable annuities are not for everyone, and it’s important to have a management firm that can help you navigate and manage these annuity products.