Can I Sell My Retirement Annuity? Here’s How It Works

A retirement annuity is a financial contract with an insurance company designed to provide a steady income stream, typically during retirement. It involves either a lump-sum payment or a series of payments made to the insurer in exchange for future periodic payouts. Annuities are often perceived as illiquid assets, meaning accessing funds before the scheduled payout can be difficult and costly. However, there are pathways to access or sell a retirement annuity, which can provide necessary liquidity under various circumstances.

Annuity Contract Features Affecting Liquidity

Annuity contracts contain specific provisions that dictate how and when funds can be accessed, directly impacting their liquidity. These features include surrender periods, surrender charges, market value adjustments, and free withdrawal provisions.

Surrender Periods

A surrender period is a defined timeframe, typically ranging from three to ten years, during which a penalty is imposed for withdrawing funds or terminating the contract. This period commonly falls within six to eight years. Its purpose is to allow the insurance company to recover initial costs and manage long-term investments efficiently.

Surrender Charges

Should funds be withdrawn or the contract terminated during the surrender period, a surrender charge is applied. This fee, often substantial, starts at a higher percentage in initial years and gradually decreases. For example, a surrender charge might begin at 7% or 8% in the first year and decline by one percentage point each subsequent year until it reaches zero. The charge is applied to the amount withdrawn that exceeds any penalty-free allowance or to the entire contract value if the annuity is fully surrendered.

Market Value Adjustment (MVA)

Some annuities also include a Market Value Adjustment (MVA), which can either increase or decrease the amount received upon an early withdrawal or surrender. An MVA comes into play if interest rates have changed significantly between the time the annuity was purchased and the time of withdrawal, particularly when withdrawals exceed free amounts or occur during the surrender period. If market interest rates are higher than when the annuity was issued, the MVA may reduce the payout; conversely, if rates are lower, it could potentially increase the payout.

Free Withdrawal Provisions

Most deferred annuity contracts offer a free withdrawal provision. This feature typically allows the annuity holder to withdraw a specified percentage of the account value annually, often up to 10%, without incurring surrender charges. This provision provides a measure of liquidity for unexpected needs, even within the surrender period, though any withdrawals are generally subject to ordinary income tax on earnings.

Options for Accessing Annuity Value

Annuity holders have several avenues to access the value within their contracts, each with distinct characteristics and implications. These options range from directly withdrawing funds from the insurance company to transferring the annuity to another entity. The most suitable method often depends on the annuity holder’s immediate financial needs and the specific terms of their contract.

Selling to a Third-Party Buyer

One method is selling the annuity to a third-party buyer. Specialized companies, often called factoring companies, purchase future annuity payments for a lump sum. This option provides immediate liquidity but typically at a discounted rate compared to the total future payments. It is a transaction where the annuity holder transfers their right to receive future payments in exchange for upfront cash.

Partial Withdrawals

Annuity contracts frequently permit partial withdrawals directly from the insurance company, allowing access to a portion of the annuity’s value without fully surrendering the contract. Withdrawals exceeding free withdrawal limits are generally subject to surrender charges. Earnings from such withdrawals are typically taxable as ordinary income, and if the annuitant is under age 59½, an additional 10% federal income tax penalty may apply.

Annuity Loans

Annuity loans allow the annuity holder to borrow against the cash value of their contract. Terms and availability vary by insurer and contract type, often requiring repayment with interest. This method provides temporary access to funds without permanently reducing the annuity’s value or incurring surrender charges, provided the loan is repaid.

Annuitization

For deferred annuities, annuitization options become available. Annuitization converts the accumulated value into a guaranteed stream of periodic income payments. Various payout structures exist, including payments for a specified period, for the annuitant’s lifetime, or for the lifetimes of two individuals. Once annuitized, payments become fixed, and the ability to access the principal sum is generally relinquished.

1035 Exchange

A 1035 exchange allows for the tax-free transfer of funds from one annuity contract to another, or from a life insurance policy to an annuity. This provision, governed by Internal Revenue Code Section 1035, enables contract holders to switch annuities without incurring immediate income tax on gains. While income taxes are deferred, surrender charges from the original annuity may still apply. The exchange must be a direct transfer between insurers, with ownership and annuitant remaining the same to qualify as tax-free.

Steps for Selling an Annuity to a Third Party

Selling an annuity to a third party for a lump sum involves a structured process. The steps focus on the mechanics of the sale, from initial inquiry to receiving payment.

Identify Reputable Buyers

The first step involves identifying reputable annuity buyers, often called factoring companies. Research several firms for transparent practices and positive reputations. Comparing multiple buyers helps secure a competitive offer.

Request Quotes

Once potential buyers are identified, the annuity holder requests quotes by providing specific annuity contract details. This information typically includes payment amounts, frequency, and remaining term. Accurate information is important for the buyer to formulate a precise offer.

Review Offers

Upon receiving offers, the annuity holder must carefully review them, understanding the proposed lump sum in relation to the total remaining value of the annuity payments. Buyers apply a discount rate, typically 9% to 18% of total future payments, to account for the time value of money and operating costs. A thorough understanding of this discount and any associated fees is important before proceeding.

Submit Required Documentation

If an offer is accepted, the next phase involves gathering and submitting required documentation. This generally includes the original annuity contract, proof of identification, and other relevant financial or legal records. The factoring company guides the annuity holder through this process.

Obtain Court Approval

Obtaining court approval is a significant part of the legal process, particularly for structured settlements (those from personal injury lawsuits or lottery winnings). A court must determine the sale is in the annuity holder’s best interest, especially considering dependents’ welfare. This judicial oversight protects sellers from unfavorable transactions. For investment annuities, court approval may not be necessary. The court approval process for structured settlements can extend the timeline for receiving funds, potentially taking one to three months.

Receive Payment

After all legal and administrative requirements are met, including court approval where applicable, the lump sum payment is disbursed. The timeframe for receiving funds can vary, from a few weeks to several months, depending on the annuity type and the efficiency of the insurance company and factoring firm. Some factoring companies may offer cash advances while the full sale process is pending. For investment annuities, the lump sum received is subject to ordinary income tax on gains, while structured settlement payments are generally tax-free.