The average return on an annuity ranges from roughly 3% to 10% per year depending on the type you buy, but fees and contract design can significantly reduce what you actually keep. Annuities are not a single product. They come in several distinct varieties, each with a very different return profile, risk level, and fee structure. Understanding which type you’re looking at is the only way to answer this question meaningfully.
Variable Annuity Returns
Variable annuities invest your money in subaccounts that work like mutual funds, meaning your returns depend entirely on how those underlying investments perform. Gross returns are often similar to popular ETFs and index funds, averaging roughly 8% to 10% annually over the long term for equity-heavy portfolios.
The catch is fees. Variable annuities carry a layer of charges you won’t find in a standard brokerage account. The biggest is the mortality and expense (M&E) risk charge, which covers the insurer’s guarantee obligations and profit margin. M&E charges typically range from 0.40% to 1.75% per year, with the average sitting around 1.25%. On top of that, you’ll pay the expense ratios of the underlying investment subaccounts, which can add another 0.5% to 1.0% or more. If you add optional riders like a guaranteed lifetime withdrawal benefit, expect another 0.5% to 1.5% annually.
Stack all those layers together and total annual costs on a variable annuity often run 2% to 3.5%. That means if your subaccounts earn 8% in a given year, your net return after all fees might be closer to 4.5% to 6%. Over decades, that fee drag compounds substantially. A $100,000 investment earning 8% gross for 20 years grows to about $466,000 in a low-cost index fund charging 0.10%, but only to roughly $321,000 inside a variable annuity charging 3% in total fees.
Fixed Annuity Returns
Fixed annuities work more like a certificate of deposit. The insurance company guarantees a specific interest rate for a set period, typically ranging from one to ten years. Your principal is protected and your return is predictable.
Fixed annuity rates move with the broader interest rate environment, particularly bond yields. When interest rates are higher, insurers can offer more competitive guaranteed rates. When rates fall, so do the offers. Fixed annuities generally yield slightly more than CDs of comparable length because you’re locking up money with an insurance company rather than a federally insured bank, and because early withdrawals trigger surrender charges rather than a simple penalty.
The guaranteed rate you see quoted is typically what you’ll earn, since fixed annuities don’t carry the same layered fee structure as variable products. However, many contracts have an initial “teaser” rate for the first year that drops to a lower renewal rate afterward. Pay close attention to the minimum guaranteed rate written into the contract, because that’s the floor the insurer can eventually reset to.
Fixed Indexed Annuity Returns
Fixed indexed annuities sit between fixed and variable products. Your principal is protected from market losses, but your upside is tied to the performance of a market index like the S&P 500. The trade-off for that downside protection is that your gains are limited through several mechanisms built into the contract.
Insurers use three main tools to control how much of an index’s gain gets credited to your account:
- Cap rate: A ceiling on your return for each crediting period. If the S&P 500 gains 14% but your cap is 8%, you earn 8%.
- Participation rate: The percentage of the index gain that counts. A 60% participation rate on a 10% index gain means you’re credited 6%.
- Spread (or margin): A flat percentage subtracted from the index gain before crediting. A 3% spread on a 10% index gain leaves you with 7%.
Some contracts use just one of these limits, others combine two or all three. The result is that real-world credited returns on indexed annuities typically fall in the 3% to 7% range over time, depending on market conditions and how aggressively the insurer sets its caps and participation rates. In strong bull markets, you’ll lag the index significantly. In bear markets, your floor of 0% (or sometimes a small minimum like 1%) looks attractive compared to actual losses in a stock portfolio.
One important detail: these rates are not locked in for the life of your contract. Insurers can adjust caps, participation rates, and spreads at each reset period in response to bond yields, hedging costs, and market volatility. The rates you see when you buy may not be the rates you get two years later.
Immediate Annuity Returns
A single premium immediate annuity (SPIA) works differently from the products above. You hand over a lump sum and the insurer sends you monthly checks for life, starting right away. There’s no account balance to watch grow, so “return” is measured as an internal rate of return (IRR) that depends almost entirely on how long you live.
Research from MIT economists found that for a 65-year-old man purchasing a SPIA, the IRR is roughly in line with Treasury yields when measured against standard annuitant mortality tables. Using population-wide life expectancy data from the Social Security Administration, the IRR falls well below Treasuries, about 1.45 percentage points lower. The gap exists because annuity pricing assumes buyers will live longer than average (and they usually do, since healthier people are more likely to buy annuities in the first place).
In practical terms, if you live to your actuarial life expectancy, your IRR on an immediate annuity will roughly match what you’d earn on safe government bonds. Live several years beyond that expectation and your effective return climbs meaningfully. Die earlier than expected and your heirs receive nothing (unless you purchased a period-certain guarantee, which reduces your monthly payment).
How Fees Shape Your Real Return
The gap between advertised returns and what lands in your pocket comes down to fees, and annuities carry more of them than most investment products. Beyond the M&E charge and subaccount expenses on variable annuities, nearly all annuity types impose surrender charges if you withdraw money during the first several years. Surrender periods commonly last six to ten years, with charges starting around 7% or 8% of the withdrawal amount in year one and declining by about a percentage point each year until they reach zero.
Most contracts allow you to withdraw up to 10% of your account value annually without triggering surrender charges. But pull out more than that, or cash out entirely during the surrender period, and the penalty can erase years of credited interest.
Administrative fees, contract maintenance charges, and the cost of optional riders all vary by insurer and contract. Before comparing annuity returns to alternatives like index funds, bond funds, or CDs, add up every layer of cost in the contract. The net return after all charges is the only number that matters.
What Drives the Differences
The wide range of annuity returns reflects a basic principle: the more risk the insurance company absorbs, the less upside you keep. A variable annuity puts market risk squarely on you, so your potential returns are highest. A fixed annuity puts all the risk on the insurer, so your return is lowest but most predictable. An indexed annuity splits the difference, protecting your downside while capping your upside.
Your age at purchase, the length of the contract, prevailing interest rates, and the specific insurer’s financial strength and pricing strategy all influence the return you’ll see. Two indexed annuities from different companies, bought on the same day, can produce meaningfully different results over a decade because of differences in cap rates, participation rates, and how aggressively each insurer resets those terms.
The tax treatment of annuities also affects your real return. Earnings inside an annuity grow tax-deferred, which is valuable if you’re in a high bracket during your working years and a lower one in retirement. But when you do withdraw, gains are taxed as ordinary income rather than at the lower capital gains rates you’d pay on investments held in a taxable brokerage account. For someone in a high tax bracket throughout their life, that difference can offset much of the tax-deferral benefit.