Surrender Charges on Fixed Annuities, Explained First

The trade-off behind the guarantee

Every fixed annuity comes with a trade-off. In exchange for a guaranteed rate, you agree to leave most of the money in place for a set period. The tool insurers use to enforce that agreement is the surrender charge. Understanding it before you sign is one of the best ways to avoid regret later.

How the charge actually works

During the surrender period, if you withdraw more than the contract allows, the insurer deducts a charge from the amount you take out. The charge is usually a percentage that declines each year, for example starting at several percent and stepping down to zero by the end of the period.

Schedules differ a lot between products. One contract's surrender period and decline schedule can look nothing like another's. There is no substitute for reading the specific contract in front of you.

What you can usually take without a charge

Most contracts aren't all-or-nothing. Many allow a penalty-free withdrawal each year, often a set percentage of the account value or the interest earned. That gives you some access to the money even while the surrender schedule is running.

Some contracts also waive surrender charges in specific situations, such as confinement to a nursing home or a terminal illness diagnosis. These provisions vary by product and by state, so don't assume one contract has the same waivers as another.

Market value adjustments

Some fixed annuities also include a market value adjustment, or MVA. If you surrender early and interest rates have risen since you bought the contract, the adjustment can reduce what you receive. If rates have fallen instead, it can increase it.

Not every product has an MVA. It's a feature to ask about directly, not something you can assume one way or the other.

How to keep a surrender charge from becoming a problem

• Match the term to the money. Use a fixed annuity for dollars you don't expect to need before the term ends.
• Keep an emergency fund elsewhere. Don't put every liquid dollar into a contract with a surrender schedule.
• Know the free withdrawal amount. If you may need some income during the surrender period, plan around what's available penalty-free.
• Consider shorter terms, or a ladder of several contracts with different end dates, if flexibility matters to you.

A surrender charge isn't a reason to avoid fixed annuities. It's part of what allows the insurer to guarantee the rate.

It just needs to fit your plan. Before you sign anything, know the length of the surrender period, the shape of the decline schedule, what you can withdraw penalty-free, and whether an MVA applies.