Annuity surrender charges: what to understand first

A surrender charge is a fee an insurance company may deduct if you withdraw more than a permitted amount from an annuity, or fully cancel the contract, during a defined surrender period, often several years from the date you purchased it. The charge typically declines each year until it reaches zero. Not every contract has one, and the schedule, free-withdrawal amount, and declining percentages can vary widely by product and carrier.

Many people consider moving money out of an existing annuity, to a new annuity, into an IRA, or out as cash, without first checking where they stand in the surrender schedule. Understanding the charge can change the timing or structure of a decision.

• What year of the surrender schedule are you currently in?
• What percentage would apply to a full or partial withdrawal today?
• Does your contract include an annual free-withdrawal allowance you haven't used?
• Are there other contract features (riders, death benefits) tied to keeping the contract in force?

A 1035 exchange can allow one annuity or life insurance contract to be exchanged for another without immediately recognizing taxable gain, but it does not automatically waive a surrender charge on the contract you are leaving. Some new contracts also start a new surrender schedule, so it can be important to compare the charge you may incur against any new features or costs of the replacement contract.

• Mortality and expense (M&E) fees and any rider charges
• Whether the contract includes a living benefit or income rider you currently rely on
• Market value adjustments (MVAs) that can apply on top of a surrender charge
• How withdrawals are taxed, and whether you are under age 59½

• What would it cost me, in dollars, to make this change today versus waiting?
• What am I replacing this contract with, and why?
• Have I requested a current in-force illustration or surrender value statement from my carrier?
• Does this decision fit into my broader retirement income plan?