Annuity Surrender Charges and Free Withdrawals: What It Costs to Get Your Money Early
Most deferred annuities charge a surrender fee for withdrawals above a free amount in early contract years. Here's how the schedule, free withdrawal provision, and market value adjustments work, with an example.
Deferred annuities are designed to be held for years. To discourage early withdrawals, most include a surrender charge that applies when you take out more than a free withdrawal amount during the first several contract years.
The short version
- Surrender charges usually decline over a set number of years.
- A free withdrawal provision often allows a percentage, commonly around 10% of the value, each year without a surrender charge.
- A market value adjustment can raise or lower the amount you receive on surrender based on interest rate changes.
- Taxes and possibly a 10% additional tax before 59½ apply to taxable earnings, separately from surrender charges.
- Some contracts waive charges for terminal illness, nursing home confinement, or death.
A worked example
A hypothetical $100,000 deferred annuity with a seven-year schedule and a 10% annual free withdrawal. In year 3, when the surrender charge is 5%, the owner withdraws $40,000.
Show the numbers behind this chart
| Surrender charge | |
|---|---|
| Year 1 (7%) | $2,100 |
| Year 3 (5%) | $1,500 |
| Year 5 (3%) | $900 |
| Year 7 (1%) | $300 |
| Year 8 (0%) | $0 |
Market value adjustments
Some contracts apply a market value adjustment (MVA) on surrender. If interest rates have risen since you bought, the MVA may reduce what you receive; if rates have fallen, it may increase it. MVAs typically apply during the surrender period only.
Waivers
Many contracts waive surrender charges in specific situations, such as:
- terminal illness diagnosis;
- confinement to a nursing home for a set period;
- death of the owner or annuitant.
Conditions and waiting periods apply.
Before surrendering
- Check the surrender schedule and the date it ends.
- Use the free withdrawal amount where possible.
- Ask for the exact surrender value, including any MVA.
- Consider taxes on earnings and any additional tax before 59½.
- If exchanging into another annuity, compare new surrender periods and costs; see annuities explained.
The takeaway
Surrender charges make early access to deferred annuity money expensive. Know the schedule, use free withdrawals, check for an MVA, and plan for taxes before taking money out.
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