The surrender period is the amount of time an investor must wait until he or she can withdraw funds from an annuity without facing a penalty. Surrender periods can be many years long, and withdrawing money before the end of the surrender period can result in a surrender charge, which is essentially a deferred sales fee. Generally, but not always, the longer the surrender period, the better the annuity’s other terms.

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What Is An Annuity?

Breaking down a Surrender Period

Surrender periods are meant to discourage investors from canceling, typically long-term contracts. Though this might stop an investor from making an emotional, hasty decision in a cyclical market, it may also limit the investor's flexibility to move money out if assets aren't performing well. Conversely, surrender periods are generally not a problem for investors who don't need liquidity or who are receiving above-market returns.

After the surrender period has passed, the investor is free to withdraw the funds without being subject to a fee. Typically, surrender fees​​​ are a percentage of the withdrawal amount. In many cases, the surrender fee declines over time. Some annuities have no surrender period and therefore no surrender fees. A typical annuity might have a surrender period of six years, and a surrender fee that starts at 6 percent and decreases by 1 percent each year.

Example of Surrender Fees

If you purchased a $10,000 annuity in 2010 with these terms and closed your annuity in 2013, which is during the third year of the surrender period, you would pay a fee of 4 percent of $10,000, or $400. The surrender period would end in 2017, at which point you could withdraw your $10,000 without paying a surrender fee. To avoid possible surrender fees, you should not put money into an annuity that you might need to withdraw during the surrender period.

If you make additional investments or premium payments to the annuity, there may be a separate surrender period for each investment. Suppose you paid $5,000 into an annuity in 2012 and another $5,000 in 2013. Again, assume a six-year surrender period with a 6 percent fee that declines by 1 percent each year. If you withdrew the entire $10,000 in 2014, you would be in year 2 of the surrender period on your first $5,000 investment, so your fee would be 5 percent, or $250, but you would only be in year 1 of the surrender period on your second $5,000 investment, so your surrender fee would be 6 percent, or $300, for a total surrender fee of $550 to withdraw your $10,000.