The decision to surrender an annuity isn’t simple and shouldn’t be taken lightly. There are surrender charges, potential penalties, and long-term impacts to consider. You need to weigh all these factors carefully to see if switching to a new annuity will actually put you in a better financial position.
Now, I’m not referring to surrendering the annuity and just putting the money back into your account because you would most likely incur a surrender charge if you’re still within the term of that annuity.
Instead, I’m talking about whether it makes sense to give up your current annuity for a potentially better option. Maybe you’re not happy with how your annuity is performing, or you’ve come across another product that promises better returns or lower fees.
Annuity Surrender Scenarios
If you’re in the first several years of your term, then it’s really going to be a hard push to put things into a positive direction and give you a positive outcome if you’re still dealing with those early surrender charges. But let’s say you’re a few years into your annuity and it’s just not performing the way you expected. Would it make sense to surrender it?
This is where things can get tricky. You have to consider whether the potential benefits of a new annuity outweigh the costs of surrendering your current one. It’s important to look at the specifics of your situation and the type of annuity you have. Different annuities have different rules, benefits, and potential pitfalls.
We’re going to look at various scenarios and break down when it might make sense to surrender an annuity and when it might not. We’ll cover different types of annuities and the factors you need to consider in each case. By doing this, we can help you make a well-informed decision that’s right for your financial future. And answering this question in different categories of annuities.
The Hard and Fast Rule for Surrendering Annuities
So the hard and fast rule for surrendering a current annuity is this: as the advisor assisting you with the surrender, we must be able to put you in a better situation within 12 months. This isn’t negotiable. We have to ensure that taking those surrender charges and moving to a new product is going to result in a better financial outcome for you.
For example, if you have a variable annuity with high fees and low returns, and we can move you to a fixed index annuity with lower fees and a higher payout, that might be a good move. But we need to crunch the numbers and make sure that within a year, you’re already seeing the benefits.
Let’s say you have a fixed indexed annuity that you funded for growth, but the caps aren’t that great. We might find a new annuity with a better cap rate and a bonus that offsets your surrender charges. We could take the guaranteed fixed interest option for the first 12 months, which can help ensure that you’re in a better position by the end of that year.
Surrendering Variable Annuities: Pros and Cons
So let’s say that you have a variable annuity and you’re wondering if you can get a higher income with another product. Variable annuities often come with higher fees and, sometimes, lower payouts compared to other types of annuities. For instance, you might be paying for features you don’t need or getting a lower return than you’d like.
If we look at the numbers and find that a fixed index annuity with an income rider offers a higher payout and lower fees, then it might make sense to make the switch. For example, if your variable annuity is set to pay you $15,000 per year, but we find another annuity that can pay you $16,000 per year, that’s a clear benefit.
Additionally, variable annuities are often set up for single life income, which means the payments stop if something happens to you. By switching to an annuity that offers a joint lifetime income, you ensure that your spouse is also covered, even if it means a slightly lower annual payout. For example, if your current annuity pays $15,000 per year, but we find a joint lifetime income annuity that pays $14,000 per year, you’re in a better position because it provides financial security for both you and your spouse.
| Scenario | Annual Payout | Fees | Income Type | Spouse Coverage | Benefit |
| Current Variable Annuity | $15,000 | Higher | Single Life | No | N/A |
| New Fixed Index Annuity | $16,000 | Lower | Single Life | No | Higher Payout |
| New Joint Lifetime Income Annuity | $14,000 | Lower | Joint Lifetime | Yes | Financial Security for Both |
In these cases, the benefits of the new annuity outweigh the surrender charges and fees of the old one. This is totally suitable to surrender and move because we’re putting you in a better position.
When to Consider Surrendering Fixed Indexed Annuities
Now let’s say that you have a fixed indexed annuity that maybe you just funded for growth and at the time the caps weren’t that great. Over the years, you might have seen better products come to market with higher cap rates or more attractive features. You start wondering if it’s worth it to move your money to one of these newer annuities.
First, we need to look at your current situation. Suppose you funded your annuity with $100,000, and it now has a current account value of $112,000, but the surrender value is only $96,000. Your current annuity might offer a 4% cap on the S&P 500, but there’s a new annuity on the market that offers a 6.5% cap and a 16% bonus on day one.
So, if we move your $96,000 surrender value to the new annuity, that 16% bonus brings you up to over $111,000 right away. We can’t predict how the index will perform in the first year, but we could choose a guaranteed fixed interest option for the first 12 months at 3.1%, bringing your value to nearly $115,000.
By making this move, you’re not only getting a higher cap rate on the S&P 500 but also starting off with a higher account value after one year. This shows how carefully evaluating your options can reveal a better opportunity that outweighs the surrender charges.
So we’re going to do these calculations and always make sure that you’re actually getting into a better position.
Here’s how our example looks:
| Scenario | Initial Funded Amount | Bonus on Day One | Account Value After Bonus | Guaranteed Fixed Interest (First 12 Months) | Account Value After First 12 Months | Increase in Value |
| Current Fixed Indexed Annuity | $100,000 | N/A | N/A | N/A | N/A | N/A |
| New Fixed Indexed Annuity | $96,000 (surrender) | 16% | $111,360 | 3.1% | $114,808 | $18,812 |
Surrendering Multi-Year Guaranteed Annuities (MYGAs)
Now let’s take a look at a MYGA or a multi-year guaranteed annuity or a fixed interest annuity. These types of annuities guarantee a fixed interest rate for a specific period, which can be very attractive in a volatile market. They provide a predictable and steady growth of your investment, without the ups and downs associated with variable annuities.
Let’s consider a scenario where you funded your MYGA with $100,000, and now your account value has grown to $112,000. However, the surrender value is only $96,000, and you’re currently getting a 2.5% interest rate. With interest rates spiking recently, you might be tempted to switch to a new MYGA that offers a higher rate, say 5.5%.
But here’s the catch: we need to ensure that switching will put you in a better position within the first 12 months. If you move your $96,000 surrender value to a new MYGA with a 5.5% interest rate, your account value after one year would be a little over $101,000. So, this is not an improvement and would not be suitable for surrender and no annuity company would touch this.
In this case, you can just consider your current MYGA a safe bucket of money and withdraw the interest, or 10% of the account value if allowed, and put it into a higher-yielding product.
| Scenario | Initial Funded Amount | Current Account Value | Surrender Value | Interest Rate | Account Value After 12 Months | Increase in Value |
| Current MYGA | $100,000 | $112,000 | $96,000 | 2.5% | $114,800 | $2,800 |
| New MYGA | $96,000 | $96,000 | N/A | 5.5% | $101,280 | $5,280 |
Recap and Final Advice For Surrendering Annuities
So just a quick recap. When considering whether to surrender your annuity, it’s crucial to evaluate if you’ll be in a better financial position within 12 months of making the switch. We’ve discussed different types of annuities and scenarios where surrendering might make sense.
For variable annuities, switching to a fixed index annuity with lower fees and higher payouts can be beneficial. Similarly, moving from a single-life income annuity to a joint lifetime income annuity can provide added financial security for your spouse. In the case of fixed-indexed annuities, it’s important to look at the potential for higher cap rates and bonuses that can offset surrender charges.
For multi-year guaranteed annuities (MYGAs), consider if the new interest rate significantly improves your growth within a year. If not, it might be best to stick with your current MYGA and utilize it as a safe investment.
Beware of advisors who might push you to surrender your annuity for their gain. Always ensure any move aligns with your long-term financial goals. Remember, only annuities offer guaranteed income, and it’s essential to carefully weigh your options before making any decisions. Only the annuities are guaranteed.
In this week’s podcast episode, I go deeper into examples and case studies of people that have been talked into surrendering their income annuities for the promise of higher market returns, and with the sales pitch that the new brokerage company will “pay the surrender charge”. That’s a farce, so do not fall for it!
In this week’s ATLAS Annuity Podcast, I show a very detailed example of how a couple that would’ve surrendered their income annuity would have to receive over a 12% return every year, for the rest of their lives, with no losses, ever, to receive the same amount of income from a managed portfolio.
Make sure to give it a watch or listen so you’ll know how to stay profitable in your retirement!
Podcast Episode 28: Should You Surrender An Annuity Contract?
Download “Should You Surrender An Annuity Contract” on Apple Music