How to Exit an Annuity: Your Options and What to Expect

You can exit an annuity, but the cost and process depend on which type you own and how long you've held it

Getting out of an annuity is possible, but it's not always free and the steps vary widely. If you're in the early years of a deferred annuity, you'll likely face a surrender charge — a penalty the insurance company takes from your withdrawal. If you've held the annuity long enough, that charge may have expired or shrunk to zero. If you own an when ready annuity that's already paying you, you generally cannot exit it at all, though you may be able to sell your future payments to a third party.

The first step is to contact your insurance company or the agent who sold you the annuity and ask for your current surrender schedule. This document shows exactly what you'd owe if you withdrew money today. Once you know that cost, you can decide whether leaving makes financial sense.

Key Takeaways

• Deferred annuities charge a surrender fee if you withdraw before the contract term ends, but this fee typically decreases each year and eventually reaches zero.
• when ready annuities that are already paying you cannot usually be cancelled, though you may be able to sell your future payments to a factoring company.
• You can withdraw a portion of your money penalty-free in some contracts through a free withdrawal provision, typically 10 percent per year.
• If you want to move money to another investment without triggering taxes, a 1035 exchange lets you transfer an annuity to a different annuity or life insurance policy.
• Surrendering an annuity means you lose any death benefit rider and may provide income promises that came with the original contract.

Understanding surrender charges and when they end

A surrender charge is a fee the insurance company deducts from your account if you withdraw more than the contract allows during the surrender period. This period typically lasts 5 to 10 years, though some contracts run longer. The charge is usually a percentage of your withdrawal — often starting at 7 to 10 percent in year one and declining by 1 percent each year until it reaches zero.

Your annuity contract includes a surrender schedule that shows the exact fee for each year. If you're in year three of a seven-year surrender period and want to withdraw $50,000, you'd look at that year's percentage and calculate what you owe. Once the surrender period ends, you can withdraw your full account value without any penalty from the insurance company.

Some contracts include a free withdrawal provision, which lets you take out a set amount — usually 10 percent of your account value per year — without triggering the surrender charge. This is one way to access money gradually without paying the full penalty, though you'll still owe income tax on any gains when you withdraw.

Withdrawing from a deferred annuity before the surrender period ends

If you need money before your surrender period expires, you have three main paths: pay the surrender charge, use the free withdrawal provision if your contract has one, or wait until the charge decreases to a level you're willing to accept.

The math matters here. If your account is worth $100,000 and you're in year two of a 10-year surrender period with a 9 percent charge, withdrawing everything costs you $9,000. But if you can wait two more years, the charge drops to 7 percent — a $2,000 difference. Weigh that savings against whether you actually need the money now.

Some people face hardship situations — job loss, medical bills, home repair — where waiting isn't realistic. In those cases, paying the surrender charge may be the only option. Others discover they chose the wrong annuity type for their goals and decide the penalty is worth the cost to move to a better fit.

Moving money to another annuity or insurance product without taxes

If you want to exit your current annuity but keep the money in an annuity or life insurance product, a 1035 exchange lets you transfer the full value to a new contract without triggering income tax on the gains. The name comes from Section 1035 of the Internal Revenue Code.

Here's how it works: you contact the new insurance company and tell them you want to do a 1035 exchange. They handle the paperwork with your old company, and the money moves directly from one policy to the other. You don't touch the cash, so there's no tax event. The surrender charge on your old annuity still applies — the exchange doesn't waive it — but you're moving the remaining balance to a contract that might better suit your needs.

This route makes sense if you're unhappy with your current annuity's features, fees, or insurance company, but you still want the tax-deferred growth and income guarantees that annuities offer. It's also useful if you want to switch from a deferred annuity to an when ready annuity that starts paying you income right away.

Selling an when ready annuity's future payments

If you own an when ready annuity that's already paying you monthly or annual income, you cannot cancel it and get your money back — that's the trade-off of when ready annuities. However, you can sell your future payment stream to a company that specializes in purchasing annuity payments.

These companies, sometimes called factoring firms or structured settlement buyers, will pay you a lump sum today in exchange for your right to receive the annuity's future payments. The lump sum is less than the total value of those payments — they're buying a discount to compensate for the time value of money and their own risk.

The process requires court approval in most states. You'll need to work with the factoring company to file paperwork, and a judge must sign off that the sale is in your best interest. This typically takes several weeks. The amount you receive depends on how many payments are left, how large each payment is, and current interest rates.

What happens to guarantees and riders when you exit

When you surrender or exit an annuity, you lose the contract's guarantees and any riders you added. If your annuity included a death benefit that promised to pay your heirs a minimum amount, that protection ends. If you had a may provide income rider that locked in a future income amount, that promise goes away.

This is an important reason to think carefully before exiting. Some people hold annuities specifically for the death benefit or the income may provide, and leaving the contract means giving up those protections. If you're exiting because you need the money, that may be unavoidable. But if you're exiting to move to a different investment, make sure you understand what you're walking away from.

You'll also owe income tax on any gains in the account when you withdraw. If you put in $50,000 and the account grew to $75,000, you owe income tax on the $25,000 gain. If you're under 59½, you may also owe a 10 percent early withdrawal penalty on the taxable gains, though some exceptions explore.

Timing your exit to minimize taxes and fees

The best time to exit an annuity depends on your personal situation, but a few patterns are worth considering. If your surrender period is ending soon — within a year or two — waiting might save you thousands in fees. If you're over 59½, you avoid the early withdrawal penalty on gains, which can make exiting more affordable.

If you're planning to exit, also think about the tax year. Withdrawing in a year when your income is lower means you'll owe less tax on the gains. Some people spread withdrawals across two tax years to keep each year's taxable income lower.

Talk to a tax professional before you exit, especially if the annuity has significant gains. They can help you understand the full cost — surrender charges plus income tax plus any early withdrawal penalty — and whether the timing makes sense for your overall financial picture.

Frequently Asked Questions

Can I get my surrender charge waived if I'm in financial hardship?

Some insurance companies will waive or reduce the surrender charge for documented hardship — job loss, serious illness, or disability — but this is at the company's discretion and not may provide. Contact your insurance company and ask about their hardship waiver policy. Have documentation ready, such as a termination letter or medical records.

What's the difference between surrendering an annuity and taking a withdrawal?

Surrendering means you're closing the entire contract and taking all the money out. A withdrawal is taking out part of the money while keeping the contract open. Both may trigger a surrender charge if you're still in the surrender period, but a withdrawal lets you keep the annuity running if you want to.

Do I have to pay income tax on the full amount I withdraw?

No. You only pay income tax on the gains — the amount the account grew beyond what you put in. Your original contributions come out tax-free. If you put in $50,000 and it's now worth $75,000, you owe tax only on the $25,000 gain, not the full $75,000.

Can I roll an annuity into an IRA to avoid the surrender charge?

No. Rolling an annuity into an IRA doesn't waive the surrender charge — you still owe it to the insurance company. However, a 1035 exchange to another annuity or life insurance product does avoid the income tax on gains, even though you still pay the surrender fee.

What happens if I die before I exit the annuity?

Your beneficiary receives the account value, usually without the surrender charge applied. Most annuity contracts include a death benefit that pays the full balance to your heirs, even if you're in the surrender period. Check your contract or ask your insurance company to confirm your specific death benefit terms.