How surrender periods of annuities work

Many people use annuities to ensure a steady income stream during retirement. But things happen in life, and you may need to access your annuity balance sooner.

If you're thinking about taking an early withdrawal from an annuity, make sure you understand how the surrender periods of annuities work and what surrender charges you may have to pay.

Generally, an annuity offers the greatest financial benefit if you don't take money out of it before you retire. Earlier withdrawals may come at a cost if taken during the annuity's surrender period, also known as a surrender charge period.

Usually, a surrender charge period starts when you acquire the annuity and lasts for the time specified in your contract. Most surrender charge periods are between three and 10 years. The six- to eight-year range is quite common.

If you withdraw money from an annuity during its surrender period, you may have to pay a surrender charge.

An annuity surrender charge is typically as a percentage of your withdrawal amount. That percentage often decreases the farther along in your surrender period you are.

For example, if your annuity has a six-year surrender charge period and you make a withdrawal two years into your contract, your surrender charge likely will be higher than if you take out that same amount three years later. If you wait to take your withdrawal until after the surrender charge period ends, you may avoid paying any surrender charges.

The following table shows how surrender charges can vary depending on when you take your withdrawal.

Most annuity contracts feature what are called rolling surrender charge periods. In this scenario, each time you add money to the annuity, a new surrender charge period begins for only that amount.

For instance, say you buy a $10,000 annuity with a six-year rolling surrender charge period. In the third year of your contract, you add $5,000. Then, four years later—after the original surrender charge period has ended but the second one hasn't—you withdraw the entire $15,000. You may then owe a surrender charge on your $5,000 contribution because it's only four years into the rolling surrender charge period but not on the original $10,000 you put in more than six years ago.

In some situations, an early withdrawal from an annuity doesn't necessarily trigger a surrender charge.

Many annuities have a free withdrawal provision that lets you pull out a portion of your funds—often 10%—during your surrender period without incurring a surrender charge.

Some annuity contracts also waive surrender charges in the event of certain circumstances, such as a job loss, the onset of a disability or as a death benefit payout.

One of the most straightforward ways to avoid annuity surrender charges is to maintain a separate source of liquid assets, such as an emergency savings account. If you have funds available to cover unexpected expenses, you may be able to leave your annuity alone until the surrender period has passed.

If you need immediate access to all the funds in an annuity, you can cancel it and cash out. Keep in mind that you may have to pay a surrender charge on the entire withdrawal minus the free amount (if applicable), and there may be tax implications, too.

However, if you cancel shortly after you open the annuity, you might be within a free-look period. A "free look" is a short time (usually 10-30 days but varies by state and type) when you can end the contract without paying a surrender charge.

If you're unhappy with the terms of your annuity and would like to move its funds to another annuity, consider an annuity transfer—also called a 1035 exchange. Depending on your situation, the transaction might incur surrender fees, but the move might make sense if the new contract's benefits outweigh the transfer costs.

Annuities are complex products. Most people use them as tools to help cover financial needs during retirement. Surrender charges are designed to discourage early annuity withdrawals, which could diminish the annuity's value and limit its benefits later when you need them most.

If you need cash while your annuity's surrender charge period is in effect, ask your Thrivent financial advisor to help you weigh all your options. Having expert guidance can help you minimize negative effects on your long-term financial plans.