Surrender of Deferred Annuities Early: An In-Depth Look At the Implications.

Shawn Plummer

CEO, The Annuity Expert

In the unpredictable terrain of financial planning, deferred annuities stand out as a beacon of security and future income assurance. However, the path to these promised benefits may be filled with potential potholes, particularly if you surrender your annuity before the annuitization period. The surrender of deferred annuities can lead to unexpected financial consequences that can significantly affect your future financial health.

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Understanding Deferred Annuities:

To delve into the matter effectively, let’s first clarify a deferred annuity. A deferred annuity is a contract between you and an insurance company where you make a lump-sum payment or series of payments. In return, the insurer agrees to make periodic payments to you at some point in the future, typically during retirement.

Deferred Annuity Surrender

The Pitfalls of Early Surrender of Deferred Annuities:

Surrender Charges

If you surrender your deferred annuity before the annuitization period, a surrender charge is one of the first obstacles you’ll encounter. This fee is often a percentage of your account’s value and varies depending on the duration you’ve held the annuity. The longer you hold onto your contract before surrendering, the lower these charges tend to be.

Example: If you surrender an annuity valued at $100,000, and the surrender fee is 7%, you’ll be left with only $93,000 from your initial investment.

Tax Implications

The second significant consequence is the tax implications. Withdrawals from a deferred annuity are taxed as ordinary income, and if you are under the age of 59½, a 10% federal penalty tax applies on top of the income tax.

Example: If you’re in the 24% tax bracket and under 59½, a withdrawal could result in a tax liability of 34%, which means you would lose an additional $34,000 from your $100,000 annuity if you decide to withdraw early.

Early Surrender Annuities

Lost Potential Earnings

Lastly, early surrender means saying goodbye to potential earnings. The power of a deferred annuity lies in its ability to grow tax-deferred over time. By surrendering early, you forfeit the chance to reap these benefits.

Example: If your deferred annuity were accruing interest at 3% annually, surrendering after just a few years would lead you to miss out on substantial growth if you had held it for 10, 20, or 30 years.

Early Surrender Of Annuities

Next Steps

While there might be situations where surrendering a deferred annuity before the annuitization period is the best course of action, doing so will likely lead to significant financial consequences. These include surrender charges, hefty tax implications, and the loss of potential earnings. As such, it is essential to consider these factors and consult with a trusted financial advisor before making such a decision. Remember, the road to financial stability may be rocky sometimes, but you can navigate toward a prosperous and secure future with informed decisions.

Early Surrender Of Deferred Annuity

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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

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

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

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