Many people have annuities as part of their overall retirement plan without understanding what an annuity surrender period entails.
Here's how to navigate your surrender period — including why it's often better to wait to withdraw funds until after the period is over.
What Is an Annuity Surrender Period?
The surrender period is the length of time you have to wait before you can withdraw all of your money from an annuity without a penalty.
How Long Is a Surrender Period?
Typically, a surrender period lasts anywhere from 3-10 years. The length of the surrender period depends on the company you use as well as the type of annuity. Each kind of annuity has its own surrender period: A fixed annuity usually has a surrender period of 3-10 years, while a variable annuity may have a surrender period of about five years.
Depending on the terms of the contract, some annuities may allow for partial withdrawals without incurring a penalty. Review the terms of an annuity before purchasing one. Otherwise, you may face penalties associated with early withdrawals.
What Are the Benefits of Waiting Until the Surrender Period Is Over?
When you purchase an annuity, you're typically charged a surrender fee if you withdraw your money early. This fee can range from just a few percent to more than 20%, depending on the terms of the contract. However, if you wait until the surrender period is over, you will usually be able to withdraw your money without paying any fees. In addition, waiting can help maximize the growth of your investment.
Unlike other types of investments, annuities grow on a tax-deferred basis, meaning you won't have to pay taxes on any gains until you withdraw the money. As a result, holding an annuity for the long term can help you increase its growth potential.
The bottom line is that there are plenty of good reasons to wait out the surrender period on your annuity. By doing so, you can avoid costly fees and give your investment time to grow.
What Are the Penalty Fees for Withdrawing During the Surrender Period?
The size of the penalty fee for withdrawing funds early varies depending on the terms of your contract. Most penalties come out to about 7-10% of your investment, but some can be as high as 20%, as previously mentioned.
Additionally, some annuities may have early withdrawal fees that are assessed on top of the surrender charge. Take this into account as you review your annuity's terms before withdrawing money.
If you're considering cashing in your annuity, contact the company providing your annuity and ask about the process. The penalties and fees associated with withdrawing before the surrender period will vary depending on the company's policy and how long you've had your annuity.
Remember, even if you are eager to cash out, there are some benefits to waiting until the annuity surrender period is over. For one, you will have more time to let your investment grow. This can be especially beneficial if the market is performing well. You may also become eligible for certain bonuses or higher interest rates if you wait until the end of the surrender period. Weigh all of your options before making a decision on whether to cash in your annuity.