How to Surrender an Annuity: Steps and Considerations

An annuity is a financial contract established with an insurance company, where an individual makes a lump-sum payment or a series of payments in exchange for regular disbursements, either immediately or at a future date. These products are designed to provide a consistent income stream, often used for retirement planning to help manage finances through post-employment years. The decision to surrender an annuity involves canceling this contract before its intended term, which can have various financial implications.

Financial Considerations of Surrender

When considering the surrender of an annuity, several financial factors can significantly impact the amount received. These include surrender charges, potential market value adjustments, and the tax implications of the withdrawal. Understanding these elements is important before proceeding with a surrender.

A surrender charge is a fee imposed by the insurance company if funds are withdrawn from an annuity before a specified surrender period. This period typically ranges from six to eight years, though it can extend up to 14 years. The charge often starts at a higher percentage, such as 7% to 10% in the initial years, gradually declining over time until it reaches zero. This charge compensates the insurer for expenses incurred in issuing the contract and managing investments.

Beyond surrender charges, some annuities, particularly fixed annuities, may include a Market Value Adjustment (MVA) clause. An MVA adjusts the surrender value based on changes in interest rates. If current interest rates are higher than when the annuity was acquired, the MVA could reduce the payout, as the insurer’s existing investments are less valuable in a higher-rate environment. Conversely, if rates have fallen, the MVA might increase the surrender value, reflecting a more favorable market for the annuity’s underlying assets. This adjustment helps the insurance company manage interest rate risk.

Surrendering an annuity triggers income tax on any accumulated earnings. The IRS follows a “gain first” rule, meaning earnings are withdrawn before the original principal (cost basis) is recovered. These earnings are taxed as ordinary income in the year the surrender occurs. For individuals under age 59½, an additional 10% federal early withdrawal penalty applies to the taxable portion. Exceptions to this penalty include withdrawals due to the owner’s death or disability, or if payments are part of a series of substantially equal periodic payments based on life expectancy.

Preparing for Annuity Surrender

Preparing for an annuity surrender involves gathering necessary information and documents. Organizing these details beforehand can help expedite the request.

Policyholders should locate their annuity contract number. Personal identification details, including a Social Security Number or Taxpayer Identification Number, are required for verification purposes. Current contact information, such as mailing address, phone number, and email address, must be readily available.

Have banking details, including the account and routing number, for direct deposit of proceeds. The original annuity contract or most recent policy statement contains this information. Valid identification, such as a driver’s license or passport, may be requested by the provider.

Before initiating the formal surrender, contact the annuity provider directly. This allows confirming specific requirements and obtaining the correct surrender forms. Understanding these steps helps in accurately completing paperwork and avoiding errors.

Steps to Surrender Your Annuity

With all necessary information prepared, the formal process of surrendering an annuity can begin. This involves requesting the appropriate paperwork from the annuity provider.

Request the surrender forms from the annuity provider. This can be done through a phone call to customer service, via their secure online portal, or by sending a written request through mail. The provider will issue the forms required for a full or partial surrender.

After receiving the forms, complete them accurately. The forms will require information like the annuity contract number, personal identification, and disbursement instructions. Some providers may require notarized signatures.

Submit the surrender application to the annuity provider. Common methods include mailing forms to a designated address, faxing them, or uploading through a secure online portal. Use a trackable method, such as certified mail, and retain copies for your records.

After submission, the provider will process the request. Processing time can vary, from a few business days to several weeks. The provider will confirm receipt and communicate the expected timeline for disbursement, which can be via direct deposit or check.

Other Annuity Options

Before deciding on a full surrender, individuals may explore other options to access funds or manage their annuity. These alternatives offer flexibility without the full costs of surrender.

One common alternative is a partial withdrawal, where a policyholder can take out a portion of their annuity’s value. Many annuity contracts allow for annual penalty-free withdrawals, often up to 10% of the contract’s value. This allows access to funds while maintaining the remaining contract, though any earnings withdrawn are subject to ordinary income tax.

Another option is a 1035 exchange, which allows for a tax-free transfer of funds from one annuity contract to another, or sometimes to a long-term care insurance policy. This provision, outlined in Internal Revenue Code Section 1035, enables policyholders to move their accumulated value to a new contract that might offer better features or interest rates, without immediate taxation on gains. While the exchange is tax-free, new surrender periods and charges may apply to the new contract.

Annuitization is the process of converting the accumulated value of an annuity into a stream of regular income payments. This can be done immediately or deferred to a future date. Various annuitization options exist, such as payments for a specified period (period certain), for the remainder of the annuitant’s life (life-only), or for the lives of the annuitant and a joint survivor. Once annuitized, the payments are fixed and cannot be changed, providing a predictable income stream.

Individuals may consider selling their annuity payments on a secondary market. This involves selling future income streams to a third-party company for a lump-sum payment. These transactions involve a discount to the total future value of payments, reflecting the time value of money and the buyer’s profit. This option is less common and often involves a legal process, including court approval, especially for structured settlements.