Understanding the Penalties if You Surrender an Annuity

If you surrender an annuity, you could be faced with some significant financial penalties. Annuities are a common device that is used for retirement planning. If you decide to get out of the contract before you reach retirement, you need understand exactly what is going to happen.

Surrender Charges

If you decide to surrender your annuity before it reaches maturity, you will have to worry about surrender charges. These are charges that you are going to have to pay to the insurance provider directly. The sooner that you surrender the annuity after starting the contract, the more the penalty is likely to be. In some cases, you could end up giving them back as much as 15 percent of your total investment. This could mean that you are going to give up a significant amount of money to the insurance company.


Many annuities have a tax-advantaged structure associated with them. This means that you do not have to pay taxes on the gains from the investments in the annuity. If you decide to get out of your annuity before you reach retirement, you will most likely have to pay a 10 percent early distribution penalty to the IRS as well as count the gains as income.

Cash Surrender Value

The cash surrender value is the amount of money that will be received by the investor when an annuity is cashed in. With most annuities, there is a certain amount of time that must pass before the annuity is considered mature. If the annuity is cashed in prior to this date, it will usually result in surrender fees. In this case, the annuity owner will have to sacrifice a certain amount of the cash value of the annuity to the insurance company. Generally, the cash surrender value will be less than what the individual has paid in premiums.

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