Written By : Alanna Ritchie
This page features 1 Cited Research Articles

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Figuring out how to get cash that is tied up in an annuity or structured settlement is difficult. Fortunately, surrendering annuities and selling payments are options that can get you access to your money.

One of the biggest perks of owning an annuity is having a long-term savings vehicle. Financial experts recommend keeping your money inside an annuity and planning to leave it untouched for years. But life doesn’t always follow the financial schedule we set for ourselves.

Whatever financial obstacle you are facing, taking money from an annuity may be the answer. You now face a major decision: how to get money from your annuity. Should you surrender your annuity or sell payments? The first option involves working with the company that issued your annuity, while the other involves choosing a payment buyer from the competitive secondary market.

Instead of putting your life on pause, consider both of these options that can get you cash in hand, putting you back in control.

Assessing Your Situation

Start finding a solution by answering certain questions that will assess your current dilemma and financial goals.

Gathering the answers to the following questions will help you decide whether you should surrender your annuity or sell payments:
  • How long have you owned the annuity?
  • What is the surrender charge?
  • Will your heirs have to pay a surrender charge?
  • Do surrender charges affect your earnings?
  • Can you get around the surrender charge?
  • How much money do you need?
  • What other retirement savings do you have?
  • What are your reasons for selling?
  • Do you need money now?

Evaluating these questions can help you address the immediacy of your needs and the financial loss of accessing your annuity funds. Also, it is important to understand any financial losses you may suffer in order to access money early.

Whichever route you take, you will be liable for taxes on the money you take out. Because annuities have tax advantages to help make retirement affordable, when you take out money early, you lose some of the tax benefits.

First, if you are younger than 59½, you will pay the IRS a penalty of 10 percent of the amount you take out. Second, you will pay income tax on any interest earnings, also known as gains, that you withdraw. The part of your payout that is based on your principal investment will not be taxed as income. Remember to plan for these events even if tax season is many months away.

Closing Out an Annuity: Understanding Surrender Charges

Surrender charges are the fees associated with selling all or a part of an annuity back to the company you purchased it from. A full surrender indicates that you are terminating your annuity policy. A partial surrender occurs when you withdraw a portion of the principal from your annuity before the end of the surrender period. Keep in mind that many annuities contain no-surrender clauses.

Some financial advisors discourage investors from purchasing annuities altogether because of surrender rules, and the possibility that these clauses and fees may not be thoroughly explained when annuity contracts are signed.

Surrender charges exist to help insurance companies recoup the expenses it incurs when setting up an annuity, such as paying commission to the sales agency and setting aside reserve funds to cover the full amount of the annuity. Issuing insurance companies make money by investing the reserve amount into low-risk, conservative portfolios that grow slowly over time. When a holder surrenders their annuity, the reserve often hasn’t had enough time to accrue interest and the insurance company doesn’t make a profit. Rather than require buyers to pay fees up front, the insurance company instead institutes a surrender charge in the case a holder sells back their annuity early.

Because the funds grow over time, surrender charges are often established on a schedule. A surrender schedule dictates how much the surrender charge will be, and for how long. In most cases, surrender charges start the year a purchase is made and decline each year for a certain number of years before they are no longer applicable. For example, in a 10-year surrender schedule, the surrender charge may be 11%, declining by one percent each year.

For those who have owned their annuity for a number of years, there is good news: You may not have to pay a surrender charge at all. Some annuity contracts provide exceptions for long-term annuity owners taking out smaller sums. You may be able to sneak by without any added fees.

Additionally, in most cases, your heirs will not have to pay a surrender charge if you die and the annuity is passed onto them.

However, if you have not owned your annuity for many years and need a larger sum, selling annuity payments may be a better bet. Before we look at selling payments, let’s take a closer look at how surrender charges are decided.

Annuity Surrender Charges: Fees & Tax Consequences

As soon as you purchase an annuity and decide to withdraw more than an allowed, pre-determined amount, you will owe surrender charges. Surrender charges are explained in your annuity contract and typically range from 7 to 15 percent of the amount you plan to withdraw from your annuity.

Surrender charges decrease as time goes by. Occasionally the initiation and conclusion of surrender fees are based on the date of paying premiums rather than when the annuity is issued.

One solution to facing high fees is waiting until the surrender period ends or the penalty is significantly lower. The charge often decreases by a percentage point each year, known as the surrender period — which lasts between seven and 10 years after you buy an annuity.

Let’s look at an example of how surrender charges might look for a $50,000 annuity contract you have owned for one year:
  • You decide to withdraw $20,000 after getting into a serious car accident.
  • You can withdraw up to 10 percent of your annuity without paying fees, so the first $5,000 is penalty free.
  • For the remaining $15,000 you need, you will owe a surrender charge.
  • Surrender charges start at 7 percent of the withdrawal amount and decrease a percentage point each following year.
  • Since you’ve owned the contract for 1 year, you will be charged 6 percent of the withdrawal amount.
  • Your surrender charge will be 15,000 X 0.06 = 900.

In summary, to get access to $20,000, you pay a fee of $900.

Read your contract carefully, as the length and specifics of surrender periods vary. Some surrender periods are based on when premiums are paid and are adjusted yearly. These surrender periods often last longer than seven years.

If you purchase a variable annuity with bonus credits (for example, where the insurance company adds a 3 percent bonus to every payment you make), these annuities have higher surrender charges and a longer surrender period.

Some annuity surrender fees are waived under special circumstances, to cover things like disability, nursing home care or a terminal illness. Read your annuity contract to find out if your situation qualifies.

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Free Look Provision

One way to avoid paying surrender charges is by utilizing the free look provision on your annuity. The free look provision is a sort of return policy on your annuity — if, after a certain period of time from your annuity purchase, you decide you want to surrender your annuity and get your money back, you may do so without paying a surrender charge. The free look provision can vary from annuity to annuity, and some companies don’t have these at all, so make sure to investigate this before you purchase an annuity. Most free look provisions are valid between 10 – 30 days after the annuity purchase.

Full Surrender vs. Partial Surrender of Annuities

Most annuities allow free withdrawals with limitations on the amount withdrawn, frequency of withdrawals, and timing of the withdrawal. For example, you may be able to withdraw the interest earnings from your annuity without paying a penalty. The longer you have owned your annuity, the higher this amount will be. Also, most contracts allow you to withdraw up to 10 percent of your annuity without paying a penalty.

These rules apply to most annuities. However, your annuity may have different withdrawal guidelines. Always read the rules for withdrawal in an annuity contract, before you sign on the dotted line.

The contracts of single premium annuities, also known as immediate annuities, are less likely to allow for a free withdrawal of funds. Deferred annuity contracts are more likely to let you withdraw a portion or all of the funds from your annuity, but you must pay surrender charges when your withdrawal is more than 10 percent.

If you are already receiving payments from an annuity, you cannot make withdrawals.

Selling Payments

Although many annuities have no-surrender clauses and high surrender fees, you still have options. Your annuity payments may be sold to a third-party settlement purchasing company, or factoring company.

You have options of selling all or only a portion of the annuity.

When selling payments, you will not pay a surrender charge; however, companies will subtract a discount rate from the amount they give you for those payments. This discount differs from company to company, but it is usually based on similar factors.

Discount factors include:
  • Payment due dates
  • Remaining amount in your annuity
  • Amount of money you need right away
  • What the company can competitively arrange to pay

Some companies will charge legal fees without disclosing this information up front. Make sure you know the net cost before you make a decision.

If you sell payments, you are still the owner of your annuity and receive a lump sum right away — possibly a cash advance if you qualify. The annuity payments you sell will go to the purchaser, and any remaining ones will still be yours.

Last Modified: June 17, 2020

1 Cited Research Article

  1. U.S. Securities and Exchange Commission. (2014, February 21). Variable Annuities: what you should know. Retrieved from https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins/updated-5