What Happens If I Surrender My Deferred Annuity Early?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Surrender Charges Before the Surrender Period Ends

When you surrender a deferred annuity before the annuitization period, and specifically before the surrender charge period has ended, you typically face surrender charges. These charges are fees imposed by the insurance company for withdrawing funds early. The amount varies based on the annuity contract but generally decreases over time. For example, a contract might have a 7% surrender charge in the first year, which gradually reduces each year until it disappears.

Deferred Annuity Surrender

Surrender Charges After the Surrender Charge Period Ends

After the surrender charge period ends, you can usually withdraw from the annuity without facing these specific penalties. However, it’s crucial to review the specific terms of your contract, as some annuities might have different rules or lingering fees even after the surrender period.

Early Surrender Annuities

Penalty-Free Withdrawals Before Surrendering the Annuity

To reduce penalties, consider making penalty-free withdrawals if your contract allows. Many annuity contracts offer the option to withdraw a certain percentage of the account value each year without incurring surrender charges. This can be a strategic way to access funds while minimizing or avoiding fees.

Annuity Surrender Strategies and Implications

StrategyDescriptionPotential BenefitsPotential Downsides
Surrender before surrender period endsWithdrawal of funds with surrender chargesImmediate access to fundsHigh surrender charges, potential tax implications
Surrender after surrender period endsWithdrawal of funds without surrender chargesNo surrender chargesPossible lingering fees, tax implications
Penalty-free withdrawals before surrenderWithdraw a percentage without chargesReduced penalties, strategic access to fundsLimited withdrawal amount, could extend surrender period
Early Surrender Of Deferred Annuity

Conclusion

Surrendering a deferred annuity before the annuitization period can have financial implications, especially if done before the end of the surrender charge period. Understanding the terms of your contract and considering penalty-free withdrawals can help reduce penalties. Always consider the long-term impact and potential tax consequences of early surrender. This knowledge can help you make informed decisions about managing your annuity.

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Frequently Asked Questions

What other options do I have instead of surrendering deferred annuities?

You may keep the annuity and receive regular payments over a set period. You can also make partial or lump-sum withdrawals, exchange all or part of your deferred annuity for another type of investment, such as stocks or mutual funds, or even convert the entire annuity into an immediate annuity that pays out a steady income for life. You may also decide to transfer the deferred annuity into a trust, which can provide tax or estate planning benefits if you choose to do so. Before making any changes to your annuity, it is highly recommended that you speak with a qualified financial advisor or tax professional to understand each choice’s legal and financial implications.

The surrender of deferred annuities has many consequences; which is the most financially severe?

The most financially severe consequence of surrendering a deferred annuity is that you may lose out on growth potential and be subject to taxes and penalties for early withdrawal. When you surrender your annuity, you will have already paid taxes on the money invested. Still, if you take out the funds before age 59 1/2, you may incur an additional 10% penalty on the taxable portion of the withdrawal. Additionally, you will forfeit any future growth and income your deferred annuity could have yielded if held until maturity.

Should I seek the advice of a qualified financial advisor before the surrender of deferred annuities?

Yes, it is highly recommended that you seek the advice of a qualified financial advisor or tax professional before surrendering your deferred annuity. They can help you understand the tax implications and associated costs of surrendering your annuity. Furthermore, they can offer guidance on whether surrendering the annuity is best for your situation and provide other alternatives.

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Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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