Annuity Surrender Periods: Understand (and Avoid) Surrender Charges

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Annuities are insurance contracts with unique features and guarantees, but they’re not the most flexible investments in the world. That's true whether you're using an annuity for lifetime income or you're planning to take lump sum withdrawals from your account.

It’s easy to put money into an annuity, but getting it back out can be challenging. In addition to potential income taxes and tax penalties, some annuities have surrender charges—which often come as a surprise to confused investors.

Key Takeaways

  • If your annuity has a “surrender period,” get familiar with surrender charges before you buy the annuity.
  • Surrender charges typically decrease over time, and eventually, they disappear altogether, so the longer you can wait before drawing on your annuity funds, the better.
  • Depending on the terms of your plan, you may be able to avoid surrender charges by limiting your withdrawal to a certain amount or by withdrawing under specific circumstances.

What Is a Surrender Period?

A surrender period is the amount of time that you must keep your funds in an annuity to avoid paying penalty charges to the insurance company. Some annuities allow you to take money out whenever you want, but if you withdraw more than 10% during the surrender period, you may pay surrender charges (or additional fees to the insurance company). Features vary from annuity to annuity, so check your contract for specific amounts, fees, and additional details.

How Surrender Charges Work

Surrender periods often last six to ten years, but other options are available (including four years, zero years, and 15 years or more). The clock starts ticking when you deposit money into your annuity, and eventually, the charges drop off. The penalty is a percentage of your “excess” withdrawal that the insurance company charges as a penalty. For example, with a penalty of 7%, a $1,000 withdrawal subject to surrender charges would cost you $70.

Declining Charges

Surrender charges typically decrease gradually over time. They start high and eventually reach zero. For a seven-year surrender period, you might see the following schedule: 7%, 7%, 6%, 5%, 4%, 3%, and 2%. Every contract is different, so be sure to read your disclosures carefully.

Surrender Charge vs. Tax

The money you pay for surrender charges goes to the insurance company as an "incentive" to keep your money invested in the contract. But you might also owe income taxes and tax penalties to the IRS on top of any surrender charges you pay.


Speak with a tax professional to estimate tax consequences before taking withdrawals or buying an annuity.

Pros and Cons

Why would you tolerate an annuity with a surrender period? Just like with a CD, you might (or might not) get certain benefits by making a long-term commitment to the investment. For example, you might receive higher guaranteed rates or gain access to other features when you accept surrender charges.

Extended Surrender Periods

Some products come with surrender periods that last a long time. If you’re going to get locked in for more than seven years or so, think carefully about how well you can predict the future. A lot can change in ten years—including your needs and the financial strength of the insurance company. Plus, you need to scrutinize the agent you’re working with and verify that they’re acting in your best interest. Long-term surrender products tend to pay generous commissions.

How to Avoid Surrender Charges

Some annuities don’t use surrender charges. No-load annuities may be available through fee-only financial advisors who earn revenue from sources other than commissions. Those contracts often have relatively low charges, but they can still have fees, and the tax rules are the same whether or not you pay a commission.

What if your money is already in an annuity and you want to take a withdrawal or transfer your money elsewhere? There might be several ways to manage any penalty charges.

Take 10%

You might be able to withdraw up to 10% of your initial investment (or another amount) from the annuity each year without paying surrender charges. You might even be able to take out earnings in the contract on top of that 10%. Speak with a customer service representative at the insurance company to calculate any “free money” available.

Find out About Waivers

Insurers waive surrender charges in some cases, depending on your circumstances and the terms of your annuity contract. For example, surrender fees might not apply if an annuitant:

  • Goes into nursing home care
  • Receives a diagnosis for a terminal illness
  • Dies, leaving the assets to heirs

Celebrate Your Anniversary

If you have some flexibility around timing, it might be worth waiting until your contract anniversary to take money out. Alternatively, it might work to take the minimum amount you need now, and get the rest after the anniversary.


Each year might offer a fresh opportunity for a lower surrender charge (as well as another free 10%), and that anniversary could only be a few weeks away.


Depending on how much you need, how quickly you need it, and other factors, you might consider annuitizing your contract. Doing so converts your lump sum into a stream of income payments. If you annuitize for a short period of time (ten years, for example) you might get what you need quickly enough.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. U.S. Securities and Exchange Commission. "Surrender Charge."

  2. Internal Revenue Service. "Publication 575 (2019), Pension and Annuity Income."

  3. U.S. Securities and Exchange Commission. "Nursing Home Waiver."

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