What Are Surrender Charges?
A surrender charge (also called a deferred sales charge or contingent deferred sales charge) is a penalty for withdrawing money from an annuity before the surrender period ends. Think of it like a CD early withdrawal penalty — except annuity surrender periods are typically longer.
Typical Surrender Charge Schedule
| Contract Year | Surrender Charge |
|---|---|
| 1 | 8% |
| 2 | 7% |
| 3 | 6% |
| 4 | 5% |
| 5 | 4% |
| 6 | 3% |
| 7 | 0% |
Free Withdrawal Provisions
Most annuities allow you to withdraw up to 10% of your account value per year without surrender charges. This is called the “free withdrawal amount.” Some contracts allow:
- 10% free withdrawal each year
- Cumulative free withdrawals (unused amounts roll over)
- Waiver for nursing home confinement
- Waiver for terminal illness
How to Avoid Surrender Charges
- Don’t withdraw more than 10%/year during the surrender period
- Match your time horizon to the surrender period — don’t buy a 10-year product if you need the money in 5 years
- Use a 1035 exchange properly — surrender charges may still apply unless the new carrier offers a bonus to offset them
- Wait it out — after the surrender period, you have full access to your money
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