How annuity surrender periods work

When you buy an annuity, you are making a longer-term commitment. Most contracts have an annuity surrender period, which is a stretch of years when taking out too much money can cost you a fee.

Knowing how this works before you buy can help you avoid surprises. Here is what to look for.

What an annuity surrender period is

A surrender period is the window of time, set in your contract, when withdrawals above a certain amount may face a charge. The length varies by product.

For indexed annuities, the SEC notes these periods often run six to ten years, and sometimes longer. Your contract will state the exact length.

A surrender charge lowers the value you walk away with. That's why it pays to treat an annuity as long-term money, as we cover in fixed annuity vs. CD.

How the charges usually work

A surrender charge is usually a percentage of the amount you withdraw. In most contracts, that percentage gets smaller over time until the period ends.

For example, a hypothetical contract might work like this:

• Year 1: a 7% charge
• Year 2: a 6% charge
• Each year after: the charge drops a little more
• After year 7: no surrender charge

These numbers are only an example. Your contract will list its own schedule, so read that section closely.

Some annuities also use a market value adjustment. It can raise or lower what you receive if you withdraw early, based on how interest rates have changed since you bought.

In general, if rates are higher when you withdraw than when you bought, the adjustment tends to reduce your amount. If rates are lower, it tends to increase it.

Ways to get money without a charge

Many annuities include some flexibility. The details depend on the carrier and your state.

• Free withdrawals: Many contracts let you take out a set amount each year, often up to 10% of the value, without a surrender charge.
• Waivers: Some contracts waive charges in certain situations, such as the owner's death. Ask which waivers your contract includes.
• Free look: Many states give you a short window after purchase to cancel the contract. The length depends on your state.

Not every annuity offers each of these features. Ask what's included before you sign.

Taxes are a separate issue

Surrender charges come from the insurance company. Taxes are a different matter, and they can apply even when no surrender charge does.

Annuity growth is tax-deferred, but withdrawals of earnings are taxed as ordinary income. If you take money out before age 59½, you may also owe a 10% IRS penalty.

Questions to ask before you buy

A few simple questions can help you pick a surrender period that fits your life.

• How long is the surrender period, and what is the charge each year?
• How much can I take out each year without a charge?
• Is there a market value adjustment?
• Which waivers are included?
• If it's an indexed annuity, how is interest credited? Our guide to what a participation rate means can help.

It's wise to keep an emergency fund outside of your annuity. That way, a surprise expense is less likely to force an early withdrawal.

You can learn more about how these contracts work on our fixed annuity page.

Common questions

What happens when the surrender period ends?

You can generally take money out without a surrender charge, though taxes may still apply. It's a good time to review whether the contract still fits your goals.

Can you get out of an annuity during the surrender period?

Usually yes, but you may pay a surrender charge on amounts above the free withdrawal limit. Many states also offer a free look window right after purchase.

Bottom line

A surrender period is a normal part of most annuities, not a hidden trap. The key is to know the schedule and choose a length that matches when you might need your money.

Our team can walk you through the terms of any contract you're considering. We're glad to help you weigh the trade-offs.

Have questions about your situation? Book a complimentary call with our team.

This article is for general education only and isn't financial, tax or legal advice. Product features vary by carrier and state. Talk with a licensed professional about your situation.