How Does an MVA on an Annuity Work? A Simple Explanation

Annuities are long-term savings vehicles designed to provide a steady income, often in retirement. These financial contracts grow tax-deferred, with earnings taxed only upon withdrawal. Some annuities include a Market Value Adjustment (MVA), which can influence the amount received upon early withdrawal.

Understanding the Market Value Adjustment

A Market Value Adjustment (MVA) is a contractual clause within certain deferred annuities that influences the payout an annuity owner receives upon early withdrawal or surrender. Its purpose is to protect the insurance company from interest rate risk. Insurers invest premiums in fixed-rate assets like bonds for guaranteed returns. The MVA helps align the annuity’s surrender value with the current market value of these underlying investments, especially if interest rates change significantly between purchase and withdrawal. For the annuitant, the MVA represents a potential adjustment, either positive or negative, to their surrender value, and while distinct from surrender charges, both can reduce the amount received from early withdrawals.

When MVA Applies to Annuities

MVA is found in fixed-indexed annuities (FIAs) and Multi-Year Guaranteed Annuities (MYGAs). These annuities offer a guaranteed interest rate or a return linked to an index, making them sensitive to interest rate fluctuations. MVAs are not a feature of variable annuities or immediate annuities.

The MVA applies when liquidity is sought before the end of the annuity’s surrender charge period. This includes surrendering the entire annuity contract or making withdrawals that exceed the annual penalty-free allowance. Many contracts permit penalty-free withdrawals, often around 10% of the contract value, with the MVA applying only to amounts beyond this. The MVA period usually aligns with the surrender charge period, which can range from five to ten years or more. The MVA no longer applies once this period concludes or if specific conditions like the annuitant’s death occur.

Calculating the Market Value Adjustment

MVA calculation compares interest rates at purchase with prevailing rates at withdrawal or surrender. If current interest rates are higher than at purchase, the MVA will be negative, reducing the withdrawal amount, as the insurer would incur a loss if forced to sell underlying bonds at a lower market value. Conversely, if current interest rates are lower, the MVA will be positive, potentially increasing the withdrawal amount, reflecting a gain for the insurer. The calculation also considers the remaining term of the annuity’s guarantee period, as longer durations amplify the impact of interest rate changes.

Impact of MVA on Annuity Values

The MVA’s financial impact depends on interest rate movements. A positive MVA increases the cash value upon early withdrawal or surrender when prevailing interest rates have fallen, while a negative MVA reduces the cash value when interest rates have risen. The MVA works with any surrender charges, affecting the net amount received. While an MVA can reduce the payout, it cannot lower the surrender value below a contractually guaranteed minimum. Withdrawals from annuities are subject to ordinary income tax on earnings, and if taken before age 59½, may incur a 10% IRS early withdrawal penalty.