Early in my career I worked for a company that sold annuities. Dozens of them, each paying a different commission. Guess which one got recommended most often.
The short answer
You can usually get out of an old annuity. What it costs depends on your remaining surrender charge, the tax on your gains, and any guarantees you would give up. Run those numbers before you move a dollar.
Why do so many people regret their annuity?
An annuity is an insurance product dressed up as an investment. Jam the two together and you often get high fees and mediocre investments inside a contract that is hard to read and expensive to leave. Insurance and investing should live independently.
You do not need a 200-page prospectus to see this. You need a statement and ten minutes with someone who is not paid based on what you buy.
What I saw selling annuities
The company I worked for sold many annuities, and every one paid a different commission. The one that got recommended was too often the one that paid the salesperson the most. It did not always work for the client.
When the commission decides the recommendation, the client is not the customer. The client is the inventory.
That is why I became a fee-only fiduciary. I take no commissions and sell no annuities. My only paycheck comes from you.
Can you get to your own money?
Ask one question of any investment: if I need this money next month, what does it cost me? With an annuity the answer is often a surrender charge, a penalty for pulling out more than a small yearly allowance (commonly 10%). It starts high and steps down over time.
The surrender staircase (hypothetical)
What it can cost to withdraw more than your free amount, by year
Example only. In this schedule the penalty falls from 7% in year 1 to 0% in year 8. Schedules vary by contract, and some run 10 years or more.
Not sure what your annuity is costing you?
Schedule a short call with me for a free Financial X-Ray:
Every fee, added up in dollars per year
Your surrender schedule and when it hits zero
Which guarantees you would keep or lose
The tax cost of each exit option
What are the most common problems with old annuities?
Layered fees. Insurance charges, fund expenses, and rider fees each look small. Together they can quietly cost several percent a year.
Riders that do not mean what you think. A guaranteed "income base" is not cash you can withdraw. It is a number used to calculate income, and you usually pay yearly for it.
Capped growth. Indexed annuities limit your share of market gains with caps and participation rates, and the insurer can often change them at renewal.
Bad tax treatment. Gains are taxed as ordinary income, withdrawals generally come out gains first, and a 10% penalty may apply before age 59½.
A tax bill for heirs. Gains in a non-qualified annuity get no step-up in basis at death, so beneficiaries can owe income tax on the growth.
The surrender clock restarts. Swapping into a new annuity usually starts a new penalty period. Often the only winner is whoever sold it.
Commission-driven sales. Annuities often pay a large up-front commission that varies by product. Ask who gets paid when you say yes.
What layered fees can look like (hypothetical)
Three fee layers on a $200,000 annuity
3.10% a year = $6,200 a year on $200,000
Over ten years, that is roughly $62,000 in costs, before lost growth on that money.
Hypothetical illustration. Your contract will show your actual costs.
| Option | How it works | Watch out for |
|---|---|---|
| Wait it out | Let the surrender period expire, then move your money penalty-free. | Fees keep running while you wait. Compare that cost to the penalty. |
| Free withdrawals | Take the penalty-free amount each year, often up to 10%. | Tax on gains if the annuity is outside an IRA. |
| IRA transfer | If the annuity is inside an IRA, move it directly to another IRA with no tax. | Surrender charges still apply. |
| Full surrender | Cash out and reinvest. | Surrender charge, plus ordinary income tax on gains. |
Frequently Asked Questions
-
Yes. You can almost always leave an annuity, but the cost depends on three things: any remaining surrender charge, the taxes owed on gains, and any guarantees you would give up. Options include waiting out the surrender period, using the annual free withdrawal, or transferring to an IRA if the annuity is inside one.
-
A surrender charge is a penalty the insurance company takes if you withdraw more than the allowed free amount during the surrender period. It usually starts around 6% to 10% and declines each year until it reaches zero, commonly over 5 to 10 years.
-
If the annuity is outside an IRA, the gains are taxed as ordinary income, and withdrawals are generally treated as gains first. If you are under 59½, a 10% federal penalty may also apply. If the annuity is inside an IRA, a direct transfer to another IRA is generally not taxable.
-
Many annuities stack several layers of fees, limit your share of market growth, lock up your money behind surrender charges, and turn investment gains into ordinary income. They also pay high up-front commissions, which can influence which product gets recommended.
-
Gather your latest statement and ask the insurer for the surrender schedule, total annual expenses, rider charges, and current surrender value. A financial professional can then total the layers and show the cost in dollars per year.
Jake Hansma, CEPA is a fee-only fiduciary financial advisor at Fiduciary Financial Advisors in the Grand Rapids area. He helps small business owners and trade contractors with tax planning, exit planning, and investment management. Contact: jake@ffadvisor.com.
