If you are looking at an annuity, or you already own one, you have probably come across the term and wondered, "What is a surrender charge on an annuity?" Here is the plain answer. During the early years of many annuities, known as the surrender period, taking out more than the contract allows or cancelling the annuity can trigger a charge, and that charge usually steps down each year until it reaches zero. It is part of how many annuities are built for the long term, and once you know how to read the schedule, you can choose and use an annuity with real confidence.
Request a Consultation or call (858) 465-4366.
This article is general education, not tax, legal, or investment advice. Pienza is not an RIA, CPA, or law firm. Contract features vary by product and state, guarantees depend on the claims-paying ability of the issuing insurer, and an illustration is not a contract.
Surrender period vs. surrender charge
These two terms travel together, and they are simpler than they sound.
The surrender period is the set number of early years in the contract. The surrender charge is what may apply if you take out more than the allowed amount, or all of your money, during that period. According to the NAIC Buyer's Guide for Fixed Deferred Annuities, the charge is a percentage of the amount you take out, and that percentage usually goes down each year until the surrender charge period ends.
How long is the period? It depends on the contract. For indexed annuities, the SEC's Updated Investor Bulletin: Indexed Annuities notes that the surrender period typically lasts six to ten years, or even longer, after you purchase the annuity. Other annuities can be shorter or longer, which is exactly why the schedule in your own contract is the one that counts.
A helpful way to picture it is a staircase. The charge starts at its highest point in year one and steps down a little each year until it reaches the ground floor, and from then on the surrender charge no longer applies.
Why many annuities have them
Annuities are designed for long-term goals, such as steady growth over time or income you can count on later in life. To support those goals, the insurer plans around holding your money for a set number of years, and that longer horizon helps support the features and guarantees built into the contract. The surrender schedule is simply the part of the design that matches the annuity to that long-term job.
What this means for you is that a surrender charge isn't a surprise fee hiding in the fine print. It is a clearly stated part of the contract that rewards using the annuity the way it was built to be used.
You can usually still reach some money
Here is the part many people are glad to learn. A surrender period does not usually mean every dollar is off-limits.
The NAIC guide explains that most annuities with surrender charges let you take out a certain amount each year, usually up to 10%, without paying surrender charges on that amount. This is often called a free-withdrawal provision, and it can give you a comfortable amount of flexibility for planned needs along the way.
Many contracts also include waivers for certain events. The NAIC guide points to death as one example, and some contracts include others. If you are curious about what happens to an annuity when the owner passes away, what happens to an annuity when you die walks through it. The specific waivers in your contract are listed in the contract and its disclosure, so it is worth reading that section closely.
One thing to keep in mind is that taking all of your money out is called surrendering the annuity, and once that happens, the contract ends along with any right to future income payments from it. Some annuities also include a market value adjustment, which can raise or lower the amount you receive on a withdrawal depending on how interest rates have moved, and your contract explains whether yours has one.
Before you buy or move money: questions worth asking
Whether you are choosing a new annuity or thinking about moving money from one you already own, best practices typically include asking a few simple questions first.
- How long is the surrender period, and what is the charge in each year of the schedule?
- How much can I withdraw each year without a surrender charge?
- Which waivers does this contract include?
- Does the contract have a market value adjustment?
- If I am considering a 1035 exchange or replacement, how much of the surrender period is left on my current contract, and would a new contract start a new schedule?
That last question is especially useful, because a move can make sense for many reasons, and seeing both schedules side by side helps you weigh the timing clearly. If an exchange is part of your thinking, our article on the 1035 exchange explains the basics.
Matching the annuity to the money's job
The simplest way to feel good about a surrender schedule is to match the annuity to the job the money is meant to do. Money you might need in the near future often belongs somewhere easy to reach, while money set aside for growth or income years from now can be a natural fit for an annuity built for the long term. When the timeline of the money matches the timeline of the contract, the surrender period tends to fade into the background.
If you are still exploring which kind of annuity fits, our annuities guide is a good starting point, and you can dig into deferred annuities, MYGAs, fixed indexed annuities, or guaranteed income annuities from there.
Reading the schedule lets you choose with confidence
A surrender charge is part of how many annuities are built for the long term, and it usually steps down over time while still leaving room to reach some of your money along the way. Once you know what the surrender period is, how the charge declines, what you can withdraw freely, and which waivers apply, the schedule stops feeling like a mystery and starts feeling like a plan. Depending on your goals, it may be worth walking through a schedule together before you decide.
Pienza is independent and carrier-neutral, so our team can help you read a contract's surrender schedule, compare options across multiple insurers, and see how an annuity might fit your retirement income plan. Learn more on our retirement planning page.
Request a Consultation or call (858) 465-4366.