What Is the Surrender Value of an Annuity?

Annuities are intended to fund your retirement, but can be cashed out early if necessary.

Annuities are intended to fund your retirement, but can be cashed out early if necessary.

Annuities are a hybrid of investment and insurance. Fundamentally they resemble a whole-life policy that's been recalibrated to provide a retirement income, instead of a lump sum at death. At any point after the purchase date but before you begin drawing your retirement income, you can choose to "surrender" the annuity and retrieve its accumulated cash value. However, surrendering the annuity can trigger significant charges.

How They Work

Before cashing out an annuity, it's important to understand how they work. They're purchased either with a lump sum, such as a pension or lottery payout, or by smaller premiums over an extended period. The company invests those funds and generates a profit. Eventually, you convert that accumulated investment into a retirement income that's calculated to last for a set period, or until you die. However, as with insurance policies, sometimes financial hardship or a change of strategy means you'll want to withdraw your money early. That can get expensive, depending on the circumstances.

Calculating Surrender Value

You'll receive annual statements from your insurance company, detailing the current values accumulated in your annuity. Some are easier to read than others, so you might need to call their customer service line and ask a few questions. The cash surrender value of an annuity is equal to the total of your premiums and any investment income that's accumulated to that date, minus any withdrawals or loans you've already taken. Depending how long you've held the annuity, there might also be a substantial surrender charge.

Surrender Charges

Annuities are more expensive to administer than other types of investment. The insurer pays fees to investment managers to handle the funds, and it pays fees to underwriters to calculate your potential for longevity. It also pays a substantial up-front commission to the broker, in most cases. If you want to cash out during the first several years you own your annuity, the company can impose stiff surrender charges to recover its costs. These can be as high as 25 percent in the early years. They'll decline over time until they vanish, usually after eight years, but in the interim they'll cut deeply into your funds.


It's important not to forget the tax man if you're thinking about surrendering an annuity. Annuities are retirement vehicles, and funds in the contract grow tax-free until the annuity is surrendered. Then, every penny of growth in your annuity becomes taxable at your marginal rate. Even worse, if you're under the age of 59 1/2 when you surrender the contract, you'll pay an additional fee amounting to 10 percent of the taxable portion. Between the surrender charges and tax implications, surrendering an annuity is not something to do without careful forethought.

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