How to Avoid Paying Annuity Surrender Charges

Avoiding annuity surrender fees requires research and careful thought.

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Annuities are an expensive product to issue. Their management costs are similar to those of any other investment, and their underlying insurance features require a full underwriting process as well. Add in the cost of broker commissions, and it can take years for the company to turn a profit on your annuity. If you want to recover your capital from the annuity during those early years, the company will levy stiff surrender charges to recover its costs. However, there are several ways to avoid or minimize these costs.

Step 1

Wait it out. You're only liable for surrender charges for a specified period set forth in detail in your annuity contract. If the fees reach zero after seven years and you've already held the contract for five, let your existing annuity continue for two more years before surrendering it.

Step 2

Withdraw your funds incrementally over a period of years. Most contracts allow you to withdraw 10 to 15 percent of your balance every year without penalty. Bear in mind, those withdrawals might be subject to taxation.

Step 3

Purchase a "no-surrender" or "level-load" annuity. These charge higher annual fees than conventional annuities, rather than a structure of declining surrender fees. If you want the option pulling out at any time, the tradeoff might be worthwhile.

Step 4

Re-allocate your investment capital. If your variable annuity is under-performing, change the underlying investment rather than surrendering the annuity itself. Most variable annuities charge little or no fee for that kind of internal transfer.

Step 5

Exchange your annuity for another one under Section 1035 of the tax code. If you switch to another annuity offered by the same company, they'll usually waive the surrender fees. This method also avoids triggering a tax penalty, a strong secondary benefit.