Annuity Surrender Charges: How Surrender Charges Work and How to Avoid Them
An annuity surrender charge is a fee an insurance company may assess if you withdraw funds or surrender your annuity during the surrender charge period. In variable annuity materials it’s often called a contingent deferred sales charge (CDSC)CDSCContingent Deferred Sales Charge. A declining fee applied to early withdrawals or surrender during the contract’s surrender period.. Understanding surrender charges and the free‑withdrawal provisions built into most contracts helps you keep more of your money.
What Is a Surrender Charge in an Annuity?
A surrender charge is a contractual fee designed to discourage early withdrawals and help the insurer recover upfront costs. Most fixed annuities and fixed indexed annuities include an annuity surrender charge schedule that declines annually until it reaches zero. During that period, you typically still have “penalty‑free” access to a portion of your account via a free‑withdrawal provision. Certain fixed and indexed contracts may also include a Market Value Adjustment (MVA)MVAMarket Value Adjustment. An interest‑rate‑based adjustment that can increase or decrease your surrender value during the surrender period., which is separate from the surrender charge.
Because surrender charges vary by product and carrier, it’s essential to match the surrender period to your time horizon. If you expect to need funds in three to five years, a shorter multi‑year guaranteed annuity (MYGA) term or ladder strategy can reduce the chance of paying a surrender charge.
How Do Surrender Charges Work?
- Surrender charge period: Commonly 5–10 years, sometimes shorter or longer. The annuity surrender charge applies when you exceed free‑withdrawal limits or surrender the contract before the period ends.
- Rolling surrender charges: Some contracts apply a separate CDSC schedule per premium, so additional contributions start their own declining timeline.
- Declining schedule: Fees usually step down each anniversary (for example, 6%, 5%, 4%, etc.) until they reach 0%.
- Interaction with riders: Income and death benefit riders may affect liquidity. Always check how rider activation interacts with surrender charges.
Example Surrender Charge Schedule
Example only. Actual schedules vary by product, state approval, and contract issue date.
Free Withdrawal Provisions: Your Annual Penalty‑Free Access
Most annuities include a free‑withdrawal provision that allows you to take out a portion of your contract value each year without paying an annuity surrender charge.
- Typical amount: Often up to 10% annually. Some contracts use 5% or provide first‑year enhanced access.
- Calculation basis: Carriers may base free withdrawals on accumulation value, cash value, or prior anniversary value.
- Tax treatment: Withdrawals are generally taxed as ordinary income. If you’re under age 59½, a 10% additional federal tax may apply. Consult a tax professional.
- Coordination with RMDs: Fixed annuities commonly waive surrender charges on required minimum distributions (RMDs). Verify your specific contract language.
If you’re evaluating liquidity alongside benefit features, see our Comprehensive Annuity Income Rider Guide.
Surrender Charge Waivers: When Fees May Be Waived
Many annuities include surrender charge waivers for specific life events or required distributions. These provisions help you access funds without incurring a surrender charge when certain conditions are met.
- Required minimum distributions (RMDs)
- Death benefit payouts
- Certain annuitization events
- Nursing home or terminal illness waivers (state and product specific)
- Long‑term care or home health care waivers if included by rider
For “before you buy” timelines, review the Annuity Free Look Period.
Market Value Adjustment (MVA): The Rate‑Sensitive Adjustment
Some fixed annuities and fixed indexed annuities include a market value adjustment during the surrender charge period. MVAs can increase or decrease the withdrawal value based on market interest rates at the time of withdrawal compared to rates on your issue date. The MVA is separate from the surrender charge and may amplify or offset its impact depending on rate movements.
How to Evaluate an Annuity Surrender Charge Schedule
- Length of surrender period and your liquidity needs
- Declining percentages over time and starting point
- Free‑withdrawal amount and calculation basis
- Rolling CDSC on additional premium
- Included waivers, triggers, and waiting periods
- Interaction with riders and income start dates
- Presence of an MVA and your rate outlook
Comparing types? Read Fixed Annuity vs Indexed Annuity.
Common Use Cases Where Surrender Charges Matter
- Short horizon: Consider shorter schedules or MYGAs for 3–5 year needs to minimize the chance of an annuity surrender charge.
- Laddering strategy: Stagger terms to phase liquidity and reduce concentration risk.
- Emergency funds: Maintain external cash reserves so you’re not forced to withdraw during your surrender charge period.
- Replacement/1035 exchanges: Review surrender charges in your existing contract and in the new schedule before you move money.
Key Takeaways Before You Buy
- Match the surrender period to your liquidity needs. See Free Look Period.
- Use the free‑withdrawal allowance each year where available. See the Income Rider Guide.
- Keep a separate cash cushion for unexpected expenses.
- Read the fine print: rolling CDSCs, MVAs, and waiver language. See MVA.
- Compare products and schedules side‑by‑side. See Fixed vs Indexed.
FAQs About Annuity Surrender Charges
What is a surrender charge in an annuity?
A surrender charge is a fee the insurer may assess when you withdraw funds beyond free‑withdrawal limits or surrender the contract during the surrender charge period.
How long do surrender charges last?
Commonly 5–10 years, sometimes shorter or longer by product. They typically decline each year until they reach zero.
What is a market value adjustment (MVA)?
An MVA is an interest‑rate‑based adjustment used by certain fixed and fixed indexed annuities during the surrender period. It can increase or decrease the withdrawal value and is separate from the surrender charge. Learn more: MVA explainer.
How can I avoid annuity surrender charges?
Use the contract’s free‑withdrawal provision, maintain separate emergency savings, align your annuity’s schedule with your timeline, and consider waiting until the surrender period ends.
Are withdrawals taxed?
Generally taxed as ordinary income; amounts withdrawn before age 59½ may incur an additional 10% federal tax. Consult a tax professional.
Do fixed annuities and fixed indexed annuities have different surrender charge rules?
Both typically use declining surrender charge schedules. Fixed indexed annuities may include MVAs more often, and rider features can impact liquidity. Always confirm with the specific contract.
Compare Surrender Charge Schedules Side‑by‑Side
We’ll walk you through free‑withdrawal provisions, waivers, and MVA language in plain English. Get a custom comparison aligned to your timeline and liquidity needs.
