The surrender period of an annuity is the stretch of years after you buy the contract when taking money out triggers a fee from the insurer called a surrender charge. Most contracts set that window between three and ten years, and the charge starts high and drops each year until it reaches zero. On top of the insurer’s fee, the IRS may add a 10% early withdrawal penalty if you’re under 59½, so the real cost of getting out early comes from two directions at once.
How Long the Surrender Period Lasts
Length depends on the type of annuity. Fixed annuities tend to run shorter, often three to seven years. Variable and indexed annuities usually run six to ten years. A few high-benefit or legacy contracts stretch beyond ten years, though that is unusual for products sold today.
Annuities that pay an upfront premium bonus (typically 1% to 5% added to your deposit) almost always come with a longer surrender period and higher ongoing fees to offset it. Some insurers also require you to give the bonus back if you surrender in the first few years.1Investor.gov. Variable Annuities The bonus looks generous on paper, but it locks you in longer.
Whatever the length, it’s fixed the day you sign. The insurer can’t extend it later, and the exact schedule is written into the contract.
How the Surrender Charge Schedule Works
The charge follows a declining schedule that rewards patience. A typical eight-year schedule looks like this:
- Year 1: 7%
- Year 2: 6%
- Year 3: 5%
- Year 4: 4%
- Year 5: 3%
- Year 6: 2%
- Year 7: 1%
- Year 8 and beyond: 0%
On a $100,000 account, surrendering in year one costs $7,000. Wait until year five and it drops to $3,000. After year seven, nothing. The insurer deducts the fee from your payout before sending you the money, so the hit is automatic.2Investor.gov. Surrender Charge
Rolling Clocks on Additional Deposits
If you own a flexible premium annuity that accepts ongoing deposits, each new deposit can start its own surrender clock. The charge isn’t based on when you opened the contract; it’s based on when each dollar went in.2Investor.gov. Surrender Charge A $10,000 deposit made five years ago and another $10,000 made last year would sit at very different points on the schedule. Before pulling funds, check which deposits are still inside their individual windows.
Market Value Adjustments
Some fixed and indexed annuities include a market value adjustment, or MVA, that stacks on top of the surrender charge. The MVA changes your payout based on how interest rates have moved since you bought the contract. If current rates are higher than the rate in your contract, the MVA reduces your payout. If rates have fallen, the MVA increases it.3Insurance Compact. Additional Standards for Market Value Adjustment Feature Provided Through the General Account
In a rising-rate environment, the MVA can add thousands of dollars in losses on top of the surrender charge. Not every annuity carries one. Those that do often pay a slightly higher guaranteed rate to compensate for the added risk, and the formula will be spelled out in the contract.
The 10% Federal Tax Penalty
The surrender charge is the insurer’s fee. The IRS layers its own penalty on top. Withdrawals from an annuity before age 59½ generally trigger a 10% additional tax on the taxable portion of what you take out.4Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (q) 10-Percent Penalty for Premature Distributions You report it on Form 5329 at tax time.5Internal Revenue Service. 2025 Instructions for Form 5329
The combined damage adds up fast. On a $100,000 annuity with $20,000 in gains, surrendering in year one could mean a $7,000 surrender charge, a $2,000 IRS penalty on the earnings, and ordinary income tax on those earnings on top of that.
Exceptions to the 10% Penalty
Federal law waives the 10% additional tax in several situations that come up for annuity owners:
- You’re 59½ or older.
- Distributions are paid to beneficiaries after the owner’s death.
- You become totally and permanently disabled as defined by the tax code.
- You take substantially equal periodic payments based on your life expectancy, at least annually. Once started, they must continue for at least five years or until you reach 59½, whichever comes later.
- Distributions come from an immediate annuity contract.
These exceptions apply only to the IRS penalty. They do not override the insurer’s surrender charge, which is a separate contractual obligation.6Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts – Section: (q)(2) Subsection Not to Apply to Certain Distributions
How Withdrawn Money Gets Taxed
The order money comes out of an annuity matters. For nonqualified annuities (those funded with after-tax dollars), the IRS treats withdrawals as coming from earnings first and principal second.7Internal Revenue Service. Publication 575, Pension and Annuity Income Every dollar you pull is fully taxable until you’ve exhausted the gains. Only after that do withdrawals start dipping into your tax-free principal.
For qualified annuities held inside an IRA or employer plan, the whole distribution is generally taxable because the contributions went in pre-tax. Nonqualified annuity owners eventually reach their cost basis and can withdraw tax-free after that point; qualified annuity owners typically cannot.
Getting to Your Money Without a Surrender Charge
Most contracts build in escape valves that let you access money during the surrender period without paying the fee. Knowing these before you need them is where the real value lies.
The Annual Free Withdrawal Allowance
The most common provision lets you withdraw up to 10% of your contract value each year (or in some contracts, the interest earned that year) without any surrender charge. The allowance does not roll over. On a $200,000 annuity, that’s up to $20,000 a year you can pull without the insurer’s fee. The IRS 10% penalty can still apply if you’re under 59½.
Required Minimum Distributions
If your annuity sits inside a qualified account like an IRA, you’ll have to take required minimum distributions starting at age 73, or 75 if you were born in 1960 or later.8Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs Insurers routinely waive surrender charges on RMD amounts so you aren’t penalized for following federal tax law. If your contract doesn’t clearly address it, ask before you buy.
Death of the Owner
Many contracts waive surrender charges when a death benefit is paid after the owner’s or annuitant’s death.9Insurance Compact. Additional Standards for Waiver of Surrender Charge Benefit Beneficiaries usually receive the full account value with no early withdrawal fee deducted. The specifics vary, so review the policy before requesting a lump sum.
Terminal Illness and Long-Term Care Waivers
Many modern contracts include riders that waive surrender charges if you’re diagnosed with a terminal illness or need long-term care in a facility for a set period, commonly 90 consecutive days. Some extend to home or community-based care. These waivers often carry a waiting period, meaning the triggering event has to occur at least one year after the contract’s effective date, and the insurer will require written proof. The exact conditions vary widely, so read the rider language before you need it.
The Free-Look Period
Every annuity buyer gets a short window after receiving the contract to cancel it entirely and get a full refund with no surrender charge. Most states require the free-look period to be at least 10 days, and many set it at 20 or 30 days. Several states extend it for buyers over 65. The clock starts when the contract is delivered, not when you signed the application.
Using a 1035 Exchange Instead of Surrendering
If you want to move into a different annuity without triggering a tax bill, a 1035 exchange lets you transfer the value of one annuity contract directly into another with no gain or loss recognized for tax purposes.10Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies The transfer has to go directly between insurance companies; you cannot take the money and reinvest it yourself.
A 1035 exchange sidesteps the income tax and the 10% early withdrawal penalty. It does not sidestep the surrender charge on your old contract. If you’re still inside that window, the outgoing insurer will deduct its charge before sending the balance. The new contract also starts its own surrender period from scratch, so you’re resetting the clock. Solving one surrender period by walking into another is only worthwhile when the new product’s terms or features clearly justify the cost.
The same provision allows a move from an annuity into a qualified long-term care insurance contract, which can matter if your needs have shifted from retirement income toward paying for care.10Office of the Law Revision Counsel. 26 USC 1035 – Certain Exchanges of Insurance Policies