Retirement planning is an essential step in financial life. Part of the transition is to ensure that your money is safe and you have income available for the rest of your life. For risk-conscious and lifestyle-minded investors, one instrument to consider for a retirement portfolio is an annuity.
Apart from principal protection, low risk, and tax-deferred growth, annuities can generate a guaranteed lifetime income. This income benefit can help ensure that the contract owner has a constant, dependable cash-flow throughout retirement.
However, there are many aspects of an annuity that people should understand before making a purchase, such as fees and conditions. One of the important conditions set out by annuities are surrender charges.
Let’s take a closer look at what a surrender charge involves.
What is an Annuity Surrender Charge?
You can think of an annuity surrender charge as a deferred sales fee. Most deferred annuities come with a “surrender period.”
The surrender period is a time-frame when excessive early withdrawals, and contract cancellations, are subject to a penalty. Generally, the surrender period tends to run from 5-15 years. The penalty levied on the withdrawn amount is the surrender charge.
To provide some liquidity, deferred annuities come with a “free withdrawal amount.” It’s a specified amount of money that can be withdrawn, annually, without fees. Free withdrawal amounts can vary, but most annuities go up to 10% of the contract value.
Note, if someone makes a contract withdrawal before age 59.5, they may have to pay a 10% penalty on the withdrawal along with ordinary income taxes.
