Cut Fees and Taxes by 73%: A 12-Year-Old Variable Annuity Audit
Angela, age 79, owned a $177,640 nonqualified variable annuity paying 3.69% in annual fees. The audit found a way to increase her guaranteed income by 12% and cut her fee-plus-tax drag by 73% — without writing a check.
Angela came to us in her late seventies with a twelve-year-old variable annuity that no longer fit her life. She had bought it for retirement income someday. Now “someday” was here. The question was whether her existing contract was still the right tool, or whether twelve years of market evolution had produced something better.
The audit found her a way to increase her annual guaranteed income by nearly 12% while simultaneously cutting her annual fee and tax drag by 73%. She did not pay a dollar of new premium to do it. This is what the analysis looked like.
- Client
- Angela, age 79
- Contract Type
- Nonqualified Variable Annuity
- Account Value
- $177,640
- Years Held
- 12+ years (out of surrender)
- Annual Fees
- 3.69% of account value
- Currently Taking Income?
- Yes – $15,000 per year
Original Goal vs. Goal Today
When Angela bought the contract twelve years ago, the brochure language and her conversation with the selling agent were focused on accumulation with optional income later. She liked that her money could grow in the market and that the contract included an income rider she could turn on whenever she wanted.
Today her situation is different. She is no longer trying to grow the account – she has already started taking payouts, totaling $37,500 so far. Her current priorities are simple: more income, lower fees. Anything she is paying for that does not serve those two goals is wasted money.
What Her Contract Actually Looks Like
| Annuity Type | Nonqualified Variable Annuity |
|---|---|
| Issue Date | More than 12 years ago |
| Surrender Period | Completed – no surrender charge |
| Current Account Value | $177,640 |
| Cumulative Payouts Taken | $37,500 |
| Annual Mortality & Expense, Admin, and Subaccount Fees | ≈ 3.69% per year |
| Income Rider | Yes – guaranteed lifetime withdrawal benefit |
| Current Annual Income from Existing Contract | $15,000 per year |
At 3.69% in combined annual fees, Angela is paying roughly $6,500 a year just to hold the contract – money that does not go toward her income, her growth, or her legacy. It is the cost of the wrapper. For a variable annuity in the early payout phase, this fee level is not unusual, but it is high.
Three Paths Forward
The audit modeled three options on the same $177,640 of value. The goal was to compare apples to apples: same money, same client, same lifetime income horizon. Here is what came back.
Annual income side-by-side
Why the SPIA Won This Audit
On guaranteed income alone, the FIA and the SPIA were nearly identical. Both improved on the existing variable annuity by about a thousand dollars a year. The deciding factor was tax treatment.
Angela’s variable annuity is nonqualified, meaning she funded it with after-tax dollars. Under current tax rules, payouts from a nonqualified SPIA use an exclusion ratio – a portion of every payment is treated as a tax-free return of her original premium, and only the gain portion is taxed as ordinary income.
For Angela, that exclusion ratio meant the taxable portion of her annual income dropped from roughly $15,000 (under her existing VA) to just over $4,000 (under the SPIA). Same gross income, dramatically less tax exposure. Combined with the elimination of the 3.69% wrapper fee, her effective fee-plus-tax drag fell by about 73%.
What the audit revealed
Angela could keep the same dollar of capital working for her, increase her guaranteed lifetime income by nearly 12%, and reduce her combined fee-plus-tax drag by 73% – without writing a check for new premium. The variable annuity that made sense at 67 no longer made sense at 79, because her goals had moved from accumulation to pure income.
The right answer was not “this contract is bad.” It was “this contract was sized for an Angela who does not exist anymore.”
What This Means If You Have a Similar Contract
If you own a variable annuity that you bought more than seven or eight years ago, three things are likely true:
- You are out of the surrender period or close to it, which means you can move funds without penalty.
- The fee schedule reflects an older product generation – variable annuity fees have come down meaningfully, and fixed indexed and immediate annuities almost always carry less drag.
- Your goals have shifted since the day you signed the application, even if you have not consciously noticed it yet.
That is exactly what an Annuity Audit is designed to surface. We do not start with “you should exchange this.” We start with “here is what you actually own, here is what it actually costs, here is what your money would do somewhere else, you decide.”
The audit is free, takes 7-10 business days, and you keep the report whether you do anything with it or not. Request yours here.
Related Audits
Want this kind of analysis on your annuity?
Get a free written audit of your existing contract. We evaluate fees, riders, and performance — then show you three quantified paths forward. No obligation.
Request my free auditAbout this case study. The client featured here is anonymized — name changed and some details adjusted for privacy. Account values, fee percentages, and income figures reflect actual audit outcomes for clients with similar contracts. Individual results will vary depending on contract specifics, carrier, current market rates, and client goals.
Before considering exchanging one annuity contract for another, all aspects of the exchange should be considered, including but not limited to cost, guaranteed interest rates, surrender charges, rider costs, possible rating changes, and different features and benefits of the two contracts. A 1035 exchange must be carefully evaluated for tax and contractual implications. Annuities are long-term investments designed for retirement planning. Withdrawals prior to age 59½ may result in a 10 percent federal tax penalty, in addition to any ordinary income tax. The guarantee of the annuity is backed by the claims-paying ability of the issuing insurance company.
Variable annuities are securities under federal law and may be considered securities under state law. If a variable or registered annuity is part of an audit, securities-related services are provided through First Palladium, LLC, Member FINRA. Past audit outcomes are not a guarantee of future results.
