How to Avoid Paying Annuity Surrender Charges

The guaranteed income payments from annuities can be attractive for some investors.
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An annuity is an investment product offered by an insurance company. Usually, an investor who purchases an annuity is looking for income payments guaranteed by the insurance company, either immediately or at some point in the future. If you sell an annuity, you may have to pay a fee to the insurance company known as a surrender charge. You may be able to avoid an annuity surrender charge in certain scenarios.


Most annuity surrender charges start out at a high level but decrease over time. If you hold your annuity until your surrender charges expire, you can avoid paying the fees even if you end up selling your annuity. A typical annuity surrender charge schedule may start at a 7 percent fee if you sell in the first year, decreasing by 1 percent per year until completely vanishing after seven years. Some annuities will hold the surrender charge at a level amount for the entire surrender fee window until dropping to 0 percent after a certain number of years.

No-Surrender Annuity

Rather than charging a surrender fee schedule, some annuities may offer a low- or 0-percent surrender charge in exchange for higher annual expenses. These annuities are known as level-load or no-surrender annuities. As opposed to traditional annuities, no-surrender annuities cost more to own on an annual basis but offer more flexibility in terms of the ability to sell at little or no cost.


If you withdraw funds from one annuity to purchase another, you'll have to pay the surrender charges on your withdrawal. This is true even if you exchange your annuities via a tax-free "1035" exchange. However, some companies may reimburse you for any surrender charges if you exchange into one of their annuities. You may also be able to avoid the surrender charge by exchanging to an annuity within the same investment company as your original annuity.

Limited Withdrawals

Most annuities allow you to take out a small percentage of your annuity value without paying a surrender charge. A typical amount would be 10 to 15 percent per year. You may still face other financial consequences of withdrawing from your annuity, such as income taxes on any gains you earn and a 10-percent penalty for taking withdrawals before age 59 1/2.


Annuities have two phases, the accumulation phase and the annuitization phase. During the accumulation phase, your annuity typically grows in value due to contributions and investment gains. Once you begin annuitization, the insurance company pays out the value of your investment over a certain period, often over the remainder of your life. Annuitization payments are not subject to surrender charges.

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