How much is a surrender charge on an annuity?

Learn how much surrender charge you will pay on an annuity, and how it is determined.

3 min read

When you buy an annuity, you are expected to hold the investment for the duration of the annuity contract. During this period, the annuity pays you a guaranteed income and the issuing insurer also earns a profit. However, if you withdraw funds or cancel the annuity, it could trigger a surrender charge.

A typical surrender charge may range from 7% to 10% in the first year, and decline by 1% in each year after that up to the end of the surrender period. The surrender period can range from three years to 10 years, or more. Hence, the annuitant would effectively have no-penalty withdrawals after the end of the surrender period.

How the surrender charge works

A surrender charge is a penalty that insurers impose when an annuity owner withdraws funds or cancels an annuity before the lapse of the annuity contract. These charges exist to protect the insurer who assumes the longevity risk of the annuity owner i.e. the risk that the annuity owner will outlive their retirement savings.

When an individual purchases an annuity, they will receive a guaranteed income stream in retirement, while the insurer stands to profit from investing the premium received when it sold the annuity. However, when the annuity owner cancels the annuity contract prematurely or withdraws funds from the annuity, the insurance company loses the potential profit it would have earned as a result of investing the annuity owner's funds. Hence, these actions could trigger a surrender charge.

The surrender charge is determined as a percentage of the annuity balance, and it decreases over time. For example, an annuity may have an 8% surrender charge in the first year, 7% in the second year, 6% in the third year, and so on, until when the surrender period expires, and there won’t be further surrender charges.

What is a surrender period?

When you purchase an annuity, you agree to a surrender period when your funds will be inaccessible. A surrender period is a period during which an annuity owner must keep the annuity in force to avoid paying surrender charges. Usually, the surrender period is specified in the annuity contract, and it can vary in length, depending on the insurance company and type of annuity.

During the surrender period, the annuitant is not allowed to withdraw money or cancel the annuity without triggering surrender charges. The surrender charges are designed to discourage annuitants from canceling the annuity contracts prematurely. Typically, the surrender charges are calculated as a percentage of the annuity value, and decrease over time, with the highest charges occurring in the early years of the surrender period.

What does it mean to surrender an annuity?

Surrendering an annuity means canceling the annuity product before the maturity date. When you surrender an annuity, you are essentially giving up your rights to receive future payments.

Generally, the annuity contract dictates the terms of surrendering an annuity, including the surrender charges, who must sign the request for surrender, and how funds are distributed after withdrawal or annuity cancellation.

For example, if you surrender an annuity with a value of $100,000 and a surrender charge of 8% in the current year, you will only receive $92,000. $8,000 will be deducted as a surrender charge. You may also owe additional costs, including income taxes and the opportunity cost of lost future income.

Surrender Charge Exemptions

There are certain circumstances when an annuity owner may be exempted from surrender charges. Some of the surrender charge exemptions include:


If the annuity owner dies before the lapse of the surrender period, the beneficiaries may receive the annuity’s full value in a lump sum payment. The insurer will waive all surrender charges for the annuity.

Nursing home care

If the annuity owner requires long-term care in a nursing home, they will be able to withdraw funds from their annuity without incurring any surrender charges. The waiver kicks in after spending a certain period in the nursing home.

Terminal illness

If the annuity owner is diagnosed with a terminal illness, and a physician has determined that he/she has 12 months or less to live, they may be able to withdraw money from the annuity without incurring surrender charges.


If an annuity owner becomes disabled and needs assistance with activities of daily living like bathing, grooming, dressing, toilet hygiene, mobility, and feeding, the insurance company will waive surrender charges to provide financial assistance.

Required minimum distributions

Once the annuity owner reaches age 72, they are required to start taking the required minimum distributions from their annuity. These distributions are exempted from surrender charges.

How to avoid surrender charges

Surrender charges are one of the significant annuity costs, and they can eat into your annuity returns. Fortunately, there are several strategies you can use to avoid surrender charges.

First, you can take advantage of the free look period. If your annuity contract has a provision for a free-look period, you may be able to get out of the contract before a certain period without incurring a surrender charge. A free look period lasts for a short period, usually 10 to 30 days, depending on the insurance company and state where the annuity is issued.

Secondly, you can take advantage of the allowed penalty-free withdrawals. Some insurers allow penalty-free withdrawals up to a certain amount, or under certain circumstances such as if you become disabled or terminally ill. Check your annuity contract to know how much penalty-free withdrawals you can make each period. 

Lastly, you can wait until the lapse of the surrender period to make a withdrawal. Typically, the surrender period can last anywhere from three to 10 years, and you won’t pay surrender charges when you withdraw funds from the annuity at the end of this period.